Mon 14 Dec 2020

Personal guarantees - some considerations for guarantors

We are regularly asked to advise directors and shareholders on the terms of personal guarantees. With the return of Crown Preference from 1 December 2020 diminishing the value of floating charge security, we expect SME lenders will increasingly rely on personal guarantees. Here, we offer some brief pointers for personal guarantors.

Extent of a guarantor's liability

There are two elements here. Firstly, can the guarantee be limited to a specific facility or is it to be granted for all sums due to the lender by the borrower? Secondly, is the guarantor's liability to be limited to a specific amount?

If the guarantee is to be limited in amount, which would often be the case when dealing with mainstream lenders subject to standards of lending practice, any sums payable over and above the limit should be clearly limited to interest, costs and expenses. If the guarantee is "all sums", remember that if the borrower has granted their own guarantee, the guarantor could inadvertently become liable for the borrower's obligations under that guarantee.

Negative pledge

We sometimes come across personal guarantees which restrict a guarantor from having any security interests over their assets. Such a restriction would extend to a mortgage over a guarantor's home and should be resisted or consent sought to such security interest from the lender ahead of signing.

Joint and several liability

If more than one guarantor is granting the guarantee, the guarantors will usually be jointly and severally liable meaning the lender can make a claim against any or all of the guarantors for the full amount. It would then be up to the guarantors to seek contributions amongst themselves. There is nothing preventing the lender seeking recovery from those with the deepest pockets.


The guarantee may give the lender the ability to apply credit balances held with it (whether funds held in personal current accounts, savings accounts or longer term deposits) towards paying off sums owing under the guarantee. Depending on the terms, the right might be exercisable at any time without notice. If the set-off provisions can't be negotiated, it's not uncommon for guarantors to ensure they have no credit balances with the lender.


The guarantee will usually provide a mechanism by which the guarantor can determine (that is to say fix) their future liability. This may be relevant in the context of working capital facilities or multiple drawing facilities. It usually involves three months' written notice being given to the lender with the guarantor tending to remain liable for obligations incurred during the notice period. While it can seem an attractive option, the likelihood is the lender will seek alternative security from the borrower or the lender will consider whether the withdrawal of the guarantee constitutes an event of default under the borrower's finance documents.

It should be borne in mind that if the guarantor is a director of the borrower, the guarantee will continue notwithstanding their resignation as a director. Just because the guarantor has forgotten about the guarantee, it doesn’t mean the lender will. The guarantor should seek a written release of the guarantee from the lender in these circumstances. Where the borrower's debt has been repaid, it's recommended that a release of the guarantee also be obtained.


With the extension of the application window for the Coronavirus Business Interruption Loan Scheme (CBILS), we are likely to see new CBILS facilities for a while yet. As a reminder, under CBILS personal guarantees can be taken by a lender for facilities of over £250,000. Where a personal guarantee is being taken, the following rules apply:

1)    the guarantee will be limited to 20% of the amount of the CBILS facility that remains after the proceeds of all business assets offered as security have been applied;

2)    the lender can only make a demand under the guarantee once it has realised all other security available to it; and

3)    security cannot be taken over a principal private residence in support of a personal guarantee.

Limb 1 should be reflected within the limit in the guarantee. Care should be taken to ensure the terms of the guarantee don't conflict with limb 2. By way of example, a guarantee would typically include an immediate recourse provision and/or a lender protection provision in which the guarantor waives any rights of requiring the lender to first enforce security from any person before claiming under the guarantee. We have recently come across a number of personal guarantees in which these provisions hadn't been tailored to reflect the Scheme rules.

Scottish peculiarities

While the law applicable to guarantees is much the same north and south of the border, Scots law has a unique accelerated enforcement procedure known as summary diligence, which guarantors should be aware of. For lenders to make use of this remedy, the parties must "consent to registration for preservation and execution", which allows the lender to register the guarantee in the public Books of Council and Session or in the books of a sheriff court. Once registered, all that is required to enforce the guarantee in the same manner as if there had been a decree (judgment) is an extract of the registered guarantee and a copy of a certificate of indebtedness. We see some lenders agree to exclude summary diligence language on the basis it can be seen as a draconian remedy and out of step with the positon in England and Wales.


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