Personal guarantees are a common feature of commercial lending, particularly for small and medium‑sized businesses. Directors, shareholders, and sometimes their spouses or family members are often asked by the Lender to provide personal guarantees in relation to the company borrowing. Such guarantees can be effective risk‑management for lenders, but they carry significant personal and financial consequences for guarantors.
Independent legal advice (ILA) plays a crucial role in ensuring that personal guarantors fully understand the obligations they are undertaking and that guarantees are enforceable.
What Is a Personal Guarantee?
A personal guarantee is a legally binding commitment by an individual to be personally responsible for a borrower’s liabilities if the borrower defaults. This typically means that a director or shareholder agrees to repay business debts from their own personal assets if the company cannot.
Guarantees are often drafted widely, covering all sums due under a facility, including interest, fees, and enforcement costs. In some cases, guarantees extend to future borrowings and survive changes to the underlying lending arrangements.
It is always prudent to note that the guarantor is often required to act as principal obliger and not merely as surely which effectively means that the Lender need not exhaust any or all its remedies against the borrower before it can pursue the guarantor. It is often a misconception held by proposed guarantors and therefore something they should be aware of before entering into the guarantee.
Why Independent Legal Advice matters
Independent legal advice is designed to protect the guarantor by ensuring that they enter into the guarantee informed, freely, and without undue influence or misrepresentation. However, in respect of a lender, ILA also reduces the risk of the guarantee being challenged or set aside at a later date, and therefore Lenders are increasingly insisting that ILA is received by the guarantor, together with a certificate of confirmation duly provided by the solicitor.
Many lenders now insist on written confirmation that independent legal advice has been given, as a condition of completing the lending to the borrower and will often not proceed without this.
Who typically needs Independent Legal Advice?
Independent legal advice is commonly required where:
A director or shareholder is guaranteeing company borrowing.
A spouse, partner, or family member is guaranteeing another person’s or a company’s debts.
The guarantor is not directly benefiting from the loan.
The guarantee is secured against personal property, such as the guarantor’s home.
What does Independent Legal Advice involve?
Independent legal advice should be provided by a solicitor who is acting solely for the guarantor (not acting for the borrower or the lender) and has no conflict of interest. Please note, it is often a requirement that the guarantor is seen alone.
The advice should typically cover:
The nature and scope of the guarantee.
The financial risks involved, including worst‑case scenarios.
The extent of personal liability and any security being granted.
Whether the guarantee is limited or unlimited in amount.
The consequences of default and enforcement action.
Guarantors should never feel rushed or obliged to sign without proper understanding and given the opportunity to ask questions.
The solicitor should confirm that the guarantor understands the advice and wishes to proceed freely. This is often recorded in a solicitor’s certificate or letter of confirmation addressed to the lender.
Practical considerations for Guarantors
Before signing any personal guarantee, guarantors should take time to review the documentation carefully. They should also consider taking independent financial advice and seriously assess whether they have the personal means to satisfy the debt if the guarantee is called upon.
A personal guarantee is never of any personal benefit to that individual and, in reality, is unfavourable, however, as it is often stipulated as a condition of the Lender, the guarantor often accepts that whilst disadvantageous to them personally, it is necessary towards the borrower successfully securing the lending facility from the lender and therefore considers it a means to an end.
Conclusion
Independent legal advice is not a mere formality in the context of personal guarantees; it is a vital safeguard for both guarantors and lenders alike. For guarantors, it ensures informed consent, risk analysis and protection from undue influence. For lenders, it enhances the enforceability of the guarantee and reduces legal risk.
Given the potentially serious and long‑lasting consequences of a personal guarantee, proper independent legal advice should always be seen as an essential part of the lending process—not an optional extra.
If you have been asked to act as a personal guarantor or would like to know more information regarding the above and would like to speak to one of our commercial property solicitors, please do not hesitate to contact us on: 0116 212 1000.
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