Personal Guarantee Agreement
This Personal Guarantee is a legally binding document that allows for an individual to assume liability for the obligations of a third party under a separate loan agreement. Frequently, a personal guarantee is sought from a director of a company which is borrowing money, or sometimes from both a director and his/her spouse. In this scenario, there will be a loan agreement between the Lender and the company. Then simultaneously, a Personal Guarantee will be signed by the director in favour of the Lender.
Under this Personal Guarantee, the Lender can request the Guarantor to repay the loan in the event that the Borrower (the company) defaults on its obligations under the Loan Agreement. The repayment by the Guarantor is ‘on demand’, which means that, following a default by the Borrower, there is no waiting period before the Lender can claim against the Guarantor.
This Personal Guarantee does not limit the maximum amount for which the Guarantor may be liable. This open-ended liability is likely to be resisted by individual Guarantors, who, in the event of failure of the Borrower to repay, are risking their personal assets, including potentially their home. Depending on the relative negotiating power of the parties, it may be necessary to draw up a guarantee with limited liability. Please see below right 'Short Form Limited Guarantee and Indemnity'.
The Personal Guarantee Agreement has relatively brief provisions and is best suited to smaller transactions. If you are looking for a document with greater layers of risk protection for the Lender (including an indemnity from the Guarantor), please consider the Long Form Limited or All Monies Guarantees – see below right.
This document is drafted as a Deed, and accordingly, care must be taken to ensure that the execution formalities are properly complied with. It is also necessary for the guarantor to take independent legal advice prior to signing a personal guarantee, to avoid any inference of undue influence. This is particularly true where the guarantor is a spouse of a director.