Some Myths about Bank Personal Guarantees
There are a lot of myths surrounding Personal Guarantees, some of which were true at one time but, of course, time does move on.
So, to dispel some of these myths, let's have a look at a few of them...
1. The Personal Guarantee was not witnessed as a Deed therefore it is invalid
The law pertaining to Personal Guarantees was written in the late 1600s and, even as recently as 2011, this was argued with some success. However, the view that the judiciary tend to take more recently is that if you sign a document as a Director you ought to act responsibly as a Director and you ought to be bound by such an agreement as a Contract if not as a Deed.
This particular view does open up other opportunities in testing the validity of a Personal Guarantee particularly if it is viewed as a Contract rather than Deed but arguing the agreement is invalid in total is a difficult one.
2. As a fully involved Director I was not told, nor had the opportunity, to get legal advice so the Personal Guarantee can't be valid
Some banks still use forms for Directors to state that they waive their right to legal advice but this a legacy from eons ago when the situation was less clear. Again the judicial view is as a Director you ought not to be signing documents you do not want to be bound by and it is for you to obtain advice.
The reality of the situation of course is that often you are just going to one Bank for the funding, often your current one, and by the time the Bank have got their act together they present the documents to you at the very last minute.
3. The Bank has a duty of care to a fully involved Director of a company
This has caused some consternation to the legal profession who work on protecting business owners from alleged Bank abuse as recent cases settled at very high levels in the court system have ruled against this. The Bank and their representatives should not mislead or induce you to sign a Personal Guarantee on a falsehood, but, they are not obliged to have a duty of care to inform you of anything that, as a fully involved Director, you ought to be aware of yourself.
4. Non-Involved Directors and Guarantors
You will note above that everything applies to fully-involved Directors. Whilst the pendulum has swung against fully involved Directors over the last few years in this regard, it can be said the protection afforded and the onus upon the banks have swung very much in the favour of the non-involved guarantor as court rulings enshrine the high level of care banks have to afford these persons.
With respect to Directors who believe they are non-involved it is possible for that to be contested by the Bank as by definition a Director is an involved person, but again more recent judgements look at the merits of each case, particularly when the non-involved Director is the spouse of the involved Director.
15 September By Mel Loades