Ellen Shipton
Solicitor
Make an enquiry
Date Published:26 Mar 2020 Last Updated:23 Jul 2021

COVID-19: Company Liquidation and Personal Guarantees – Are You at Risk?

Banking & Finance Litigation

A personal guarantee can hold a company director personally liable if its business is unable to repay the money owed. Personal guarantees are often required when first taking out a business loan or tenancy, especially for small and medium-sized enterprises. Most directors agree to guarantee loans on the assumption that the lender will never have any cause to rely on it and to take action against the director personally.

What is the impact of COVID-19?

Unfortunately, due to the current situation, many businesses are now facing unprecedented times and severe financial difficulties. A considerable amount of companies, particularly in certain sectors such as travel and hospitality, are likely to struggle to remain solvent and therefore the risk of entering into an insolvency process is increased.

In addition to the risk of a director losing their business, many will have entered into personal guarantees as well, meaning that the impact of COVID-19 will extend beyond the business world and may impact them personally as well.

Can anything be done?

English law is notoriously lender-friendly. Case law shows us that the Court will always start from a position of scepticism when assessing an allegation by a company’s director or major shareholders that they did not know what they were signing when they entered into guarantees in support of their company’s borrowings.

However, there are a range of considerations that should be given in assessing personal guarantees and especially when looking to reduce your liability as a director.

Key legal issues affecting personal guarantees

  • Contractual issues and formalities
    • The terms of a personal guarantee must be sufficiently certain and complete to enable the Court to give effect to them.
    • A personal guarantee must be in writing and signed by the guarantor (or some other person lawfully authorised to sign on the guarantor’s behalf). If the personal guarantee is not in writing, it will be unenforceable.
    • A personal guarantee can be created by electronic means such as by email.
  • Characteristics of personal guarantees
    • The liability of a personal guarantee is dependent on the underlying obligation entered into (e.g. the loan or other agreement entered into) – this is the principle of “co-extensiveness”.
    • The principle of co-extensiveness does not apply to indemnities. It is for this reason that lenders usually expect an indemnity and a personal guarantee to be signed together, as the indemnity affords more protection. If the primary underlying agreement (e.g. the loan agreement) is found to be void or unenforceable, it will be easy to set the personal guarantee aside but more difficult to set the indemnity aside.
    • The liability of a guarantor is a secondary obligation, dependent on the principal failing to perform its guaranteed obligations under the primary agreement (e.g. the loan agreement).
  • Unfair contract terms
    • Where the personal guarantee is in standard form, the tests of reasonableness and fairness will apply. If there is an unfair term within the personal guarantee then it may not be binding on the guarantor. It is an established principle of English law, as per RBS v Etridge (No.2) [2002] 2 AC 773 that:
    • a creditor is obliged to disclose to a guarantor any unusual feature of the contract between the creditor and the debtor which makes it materially different in a potentially disadvantageous respect from what the guarantor might naturally expect”.
  • Undue influence and misrepresentation
    • Undue influence and misrepresentation can arise in numerous relationships where a fiduciary relationship exists. In addition, the case of RBS v Etridge (No.2) [2002] 2 AC 773 set out that, subject to a number of exclusions, a lender should be put on notice of undue influence and/or misrepresentation where a wife is to guarantee her husband’s debts of a company even if she may be jointly liable or is a director.
    • There are a number of steps which a lender can take to minimise the risk of undue influence/ misrepresentation being used as a defence to a personal guarantee, which include ensuring that guarantors take independent legal advice.
    • In addition, it is possible that a guarantor can seek to rely on the defence of undue influence if they entered into the particular transaction in question as a result of undue influence exercised by the lender. “Inaccurate explanations of a proposed transaction” can also amount to undue influence according to RBS v Etridge.

How can Ellis Jones help you?

Here at Ellis Jones, our Banking and Finance Litigation department regularly deals with disputes arising from personal guarantees and has had many successes in challenging these.

Our specialist advisors here at Ellis Jones will be happy to assist you in reviewing the terms of any personal guarantees, and the underlying agreements, upon which your lender may be seeking to rely.

If you have concerns surrounding the personal guarantee entered into, please do not hesitate to contact Ellen Shipton or William Fox Bregman in our Banking and Finance Litigation team for a no-obligation initial chat. Our telephone number is 01202 057733 and our email address is banking@ellisjones.co.uk.