Personal Guarantees

Maximising recovery in difficult times

Historically, Personal Guarantees (“PG’s”) have often come to the rescue of many a financier in failed client situations. However, as the recession begins to bite, it is becoming increasingly difficult for financiers to collect out any shortfall on their ledgers by relying upon a PG’s to “mop up” the balance.

There are a number of reasons for this – the obvious ones stemming from the fall in house prices, the inability of a guarantor to remortgage and the difficulty of securing more traditional forms of bank loan to settle the outstanding indebtedness.

However, at FWJ we have also observed a marked increase in what might be called “kitchen sink” defences being pleaded by desperate guarantors.

1. It may sound obvious, but ensure that documents are properly signed and witnessed. Ideally the witness should not be another member of the family/firm.  Witnessing by another solicitor is usually best.

2. Consider insisting that guarantors go to an independent firm of lawyers to have the nature and obligations of the PG explained to them. A so called Etridge Certificate will allow you to proceed to summary judgment more readily in cases where undue influence is pleaded.

3. Make sure proper notes are taken of who sent out the PG for signing and, if possible, document in some way the receipt back of the PG (if posted) and follow this up with a letter/telephone call to confirm safe receipt and the identity of the signature.

4. Try and monitor the wealth of the guarantor during the course of the relationship with your client, not just at the beginning. Whilst most guarantors are reluctant to provide a charge over their property at the outset of the agreement, if regular monitoring of the wealth of the guarantor reveals something concerning about the business/individual concerned, you can at that stage seek a voluntary charge as a way of enhanced security. As a minimum it can highlight the possibility of problems and you can either manage the situation out or seek PG’s from other individuals.

5. In cases where the only asset appears to be limited equity in the property, thought needs to be given as to whether traditional high court/county court proceedings are the most sensible way to try and recover the debt. In a falling property market, any equity could be extinguished by the time you win at trial – begging the question as to the point of bringing the claim in the first place.

6. Whilst it is more high risk in terms of a potential adverse costs order, in situations of limited equity, you may even consider the use of a statutory demand against the guarantor. Not only is this more threatening in the legal sense (and thus might lead to a quick settlement) but it also has two other advantages: 

• You will find out at a very early stage whether the claim is disputed and, if so, the likely defences you would face in standard county court/high court proceedings.

• If there isn’t a genuine dispute then you can proceed with the ultimate threat of a bankruptcy petition. Both of the above could save you considerable time and expense in cases where limited equity is available by avoiding lengthy high court/county court claims.