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Independent Banking Advisory Service |
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Personal Guarantee or Personal Guarantees Bank Guarantees, Personal Bank Guarantee, Personal guarantees and Personal Guarantees for SFLGS are requested from individuals by Banks and lenders in a number of different circumstances, usually to provide additional security for borrowing. Proprietors, partners and directors of limited companies are requested to provide personal bank guarantees for their company's borrowings so that the bank has additional banking security to that already in place. A guarantor undertakes that he or she will repay a debt incurred by another person or company to a bank or other creditor. The bank or other creditor can require him or her to pay the outstanding amount if that person or company which is the principle borrower cannot (or will not) pay their indebtedness. Banks will, in most circumstances require any guarantee to be secured, that means they will seek a legal mortgage over a proprietor’s, director's or partner’s house. The same will occur if the guarantor is an unconnected third party. In the case of co-guarantors each guarantor will be fully liable for the outstanding amount subject to their guarantee. However, co-guarantors need to resolve their respective business obligations between themselves and will require a properly formulated and legal ‘exit’ strategy should they resign their partnership or directorship or ‘pass’ their business on to others in any way. Example: Mr A was in business for himself and was already borrowing considerable sums from the bank on overdraft. The business was expanding fast and he did not have any more security to offer the bank. However, he requested more money from the bank to meet the expansion of the business. Mr A’s Father in law (Jack) wanted to help - so the bank sought a personal guarantee from Jack and also his wife (Judy) for a guarantee for 40k. The guarantees were provided for a solicitor to advise. Despite the advice, the personal guarantees were signed. The guarantees were also secured on Jack & Judy’s house as the bank had requested. The bank lent up to the limits of the overdraft agreement with Mr A and often beyond it. Jack and Judy never worked for Mr A’s business; they had no control over the business borrowings and received nothing from the business at all. Shortly afterwards, Mr A left their daughter - a divorce coincided with the business demise. The bank sent formal demand to Jack & Judy for payment under their guarantee - which was for 40k plus interest plus costs. Mr A had considerable debt and his unsecured creditors petitioned for his bankruptcy. There was a considerable sum left outstanding to the bank. As the bank had obtained guarantees with security it meant that Jack & Judy were facing a 40k plus debt to the bank after Mr A’s bankruptcy. The bank requested payment but they got no response. As the bank didn’t ‘push’ for repayment Jack & Judy thought they’d just ‘gone away’. However, some ten years later Jack & Judy wanted to plan an anniversary party and an overseas holiday trip. They applied for a remortgage to do this. This immediately prompted a demand from the bank for payment which was considerably more than 40k and secured under the bank’s mortgage for payment. The bank was now less ‘friendly’ and having waited 10 years and having added interest for that period – now wanted the money owed on the guarantees or legal action would be taken to obtain full payment by possession proceedings. Note: The above is not an unusual scenario and many personal guarantees are provided to Banks or lenders too easily by partners, directors and spouses and also by other relatives, friends and even business acquaintances. Often, these guarantors have no input or any control whatsoever over the business itself or business borrowings or volume of business borrowings on which they have guaranteed payment. It can be a very costly error.
Recently, a growing number of guarantors have come to us for our assistance, realizing their personal position is now at risk from a previous undetermined guarantees. Unfortunately, many have already taken action, which have made their position much worse. This may have been through solicitors being involved who do not understand how banks react on these issues, or the customer not understanding the greater risks created by their own action in contacting the bank, without first obtaining professional and knowledgeable assistance.
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