Offering a personal guarantee on credit for a business might make the funding more accessible, but can be risky given the unpredictability of running a company. This is true even when the agreement is voluntarily entered into – unfortunately, this isn’t always the case.
Steve Thomas, dispute resolution and insolvency partner at Excello Law, recently acted for a director who had signed a credit application form on behalf of his company. Hidden within the fine print, the form stated that by signing our client was personally guaranteeing the amount of credit given to the company.
The director was unaware of the personal guarantee provision until after the company entered liquidation and he received a letter of claim claiming in excess of £200,000, stating that he was personally eligible for the sum.
What defence is available against a personal guarantee?
The possible defences against a personal guarantee are limited, but exist nonetheless. Our client’s evidence was that he would not have signed the credit application form if he had known it included a personal guarantee, and that after the date of signing the supplier had made no reference at all to the guarantee. In addition to manifest errors within the credit application form and subsequent changing of credit limits, we argued that the provision was non-binding and added within the fine print in a way it could be obviously missed.
Changing credit levels over the course of the trading relationship were an additional grounds for defence in this case. As the credit granted to the business grew over time, we argued that if our client was liable, he could only ever be held liable for the initial amount of credit. Because the credit was later revised upwards, this change served to invalidate the guarantee as a whole.
Resolution for our client
We initially put these arguments to the supplier as reason to cease their claim. While the supplier (and their legal team) did not publicly accept the arguments raised on behalf of our client, they decided not to pursue the debt. Our client therefore did not have to pay what would have been a substantial sum, and did not need to engage in litigation.
The laws in England and Wales concerning personal guarantees are complex. Over the years we have achieved great success in exposing the various mistakes and errors which are often present when a claimant relies on a personal guarantee to demand payment from a director, due to a lack of care during drafting and implementation of a contract.
Many guarantees follow precedents which have not changed for many years and so repeat the same mistakes – whether drafted by lawyers or, increasingly, by AI. We have even seen companies getting their own name wrong in the terms and conditions of their own business.
Directors facing a claim under a personal guarantee should immediately seek expert legal advice as sometimes all is not what it seems at first glance.
