Personal guarantees: what you actually signed

Most founders remember signing one. Almost nobody remembers signing four, and none of them end when the deal that produced them does.

Problems, in order · Part of Outsourced General Counsel

Most founders remember signing one personal guarantee. Almost nobody remembers signing four.

They accumulate quietly, and never in the same month. The bank wanted one for the overdraft because the company had two years of accounts and very little to secure against. The landlord wanted one because the covenant was thin. The invoice finance provider made one a condition of the facility, in a schedule nobody read aloud. A key supplier asked for one when credit terms moved from thirty days to sixty. Each was signed by a different route and filed in a different place, and by the time the business is worth selling, nobody inside it can list them.

The signing is not the mistake. A guarantee is often the price of getting a business funded, housed and supplied, and refusing all of them would have meant refusing the growth. The mistake is assuming the obligation ends when the relationship that produced it does.

Does a personal guarantee end when I sell the company?

This is the most expensive misunderstanding in the area, and it survives because the logic feels right. You have gone. Somebody else owns the business, runs it and takes the profit. Why would you still stand behind its overdraft?

Because you never promised the company anything. You promised the bank. The bank lent against your name as well as the company's, and nothing in a share purchase agreement alters an agreement the bank was not party to. A buyer's undertaking to procure your release is a promise from the buyer to you. It is enforceable against the buyer, and it is worth exactly what the buyer is worth on the day the creditor rings.

Release comes from one place only, which is the creditor, in writing. Everything else is a plan to obtain a release.

What you actually signed

A guarantee has been treated as a distinct species of promise for nearly three hundred and fifty years, and the formality requirement has not moved since:

Two useful things follow. The first is that a guarantee always exists as a document, so the question "what did I sign?" always has a findable answer. The second is that the document governs. What the relationship manager said at the time, what the heads of terms implied, and what you understood the arrangement to be all rank behind the words on the page above your signature.

Read those words and three questions decide most of it. Is it a guarantee, or a guarantee and indemnity? Is it capped, and does the cap include interest and enforcement costs? Is it limited to the facility in front of you, or is it an "all monies" guarantee?

The all monies version is the one that catches people. It secures whatever the company owes that creditor now or at any point in future, so refinancing the original loan does not extinguish it, and a new facility from the same bank three years later falls inside it without you signing anything further.

The four places guarantees hide

They sit in four places in practice, and the fourth is the one nobody looks at.

Lending is the obvious one: overdraft, term loan, asset finance, invoice discounting. The lease is next, and it is rarely called a guarantee in conversation. It is usually a separate deed executed on the same day, or a clause naming you as surety somewhere after the repairing obligations.

Third is the supply chain. Trade credit application forms routinely carry a director's guarantee in the paragraph above the signature block, and those forms are signed by whoever happened to be running the account that quarter.

Fourth is the group. Where a trading company guarantees the obligations of a sister company, or where you personally guaranteed a business you have since closed, the guarantee does not die with the trading. It lies dormant until somebody produces it.

Does assigning the lease release me?

Assigning a lease feels like a clean exit, and the statute appears to agree. Section 5 of the Landlord and Tenant (Covenants) Act 1995 provides that a tenant who assigns the whole of the premises demised to him "is released from the tenant covenants of the tenancy".

What the Act gives with one hand it qualifies with the other. A landlord may make consent to assignment conditional on the outgoing tenant entering an authorised guarantee agreement, guaranteeing the assignee's performance. So the release arrives with a fresh guarantee attached, covering a different tenant's behaviour in a building you no longer occupy. A founder who personally guaranteed the original lease can end up standing behind a company they have never met.

That is not a reason to refuse an assignment. It is a reason to negotiate the scope and the duration of the authorised guarantee agreement while the landlord still needs to give you something, which is the only moment there is any leverage in the conversation at all.

How do I find every guarantee I have given?

Nobody keeps a register, so you build one, and the order matters.

Start with filed charges at Companies House. They will not list personal guarantees, but they name every secured lender, and every secured lender is a candidate. Then write to each of those lenders asking for a schedule of all security held, personal and corporate. Banks answer this quickly, because they hold the file and the request is unremarkable.

Then the property: every lease, every deed of surety, and every licence to assign, which is where an authorised guarantee agreement will be sitting. Finally the top twenty suppliers by spend, whose credit application forms are the least documented and the most likely to contain something.

That is a week of somebody's attention, and for a founder approaching a sale, a refinancing or a retirement it is the highest-value week available. It is also standing work rather than project work, which is why it sits naturally with an outsourced General Counsel alongside the contract register it belongs next to. Where a guarantee has already been called, the same reading drives the answer, and our debt recovery work runs from the same documents in the opposite direction.

What can realistically be negotiated out

Not the guarantee itself, usually, and never at the moment a creditor has become nervous. Three things do move.

A cap is the first. Creditors resist deleting a guarantee and will often agree to limit one, particularly at renewal, when the accounts are stronger than they were when it was given. A guarantee capped at the original facility is a different risk from an uncapped all monies one, and the difference is a number you can put in front of a spouse.

A sunset is the second. A guarantee that falls away once the company has met a stated covenant for a defined period gives the creditor what it actually wants, which is cover for the period it is unsure about you rather than cover for ever.

The order of enforcement is the third. A creditor that must exhaust its security against the company before coming to you is a materially better counterparty than one entitled to come straight at your house, and that wording is negotiable more often than founders expect.

All three are renewal conversations. Raising them mid-term and unprompted tells a lender that something has changed.

Where a specialist is needed

Enforcement against a guarantor is litigation, and litigation is conducted by a firm with rights of audience, which Dinmore Bell instructs, briefs and manages. Where a guarantee runs into personal insolvency, an individual voluntary arrangement or a bankruptcy petition, an insolvency practitioner is instructed. Where release is part of a share sale, the tax treatment of any payment made to obtain it belongs with your accountant.

What Dinmore Bell owns is everything in front of that: finding them, reading them, telling you plainly what you are standing behind, and negotiating at the moment the creditor is willing to move.