When operating a business that regularly contracts with other corporate entities, it is important to consider whether your agreements are secured by personal guarantees.
What is a personal guarantee?
A personal guarantee is a written promise by a third party to a contract to guarantee the performance of the financial and other obligations of another party to that contract. A guarantee can be provided by any third party, including another company, but in most cases it is usually provided by the directors and/or shareholders of a company which has entered into the contract.
Why should you have a personal guarantee?
Personal guarantees are important for businesses of all sizes, but increasingly so for those who invoice their clients in arrears, or trade with entities which hold little to no assets. The benefits of a personal guarantee are most evident when seeking to enforce a debt owed to your business. Some of these benefits are as follows:
- When seeking to recover a debt from a company that is in liquidation, the individuals guaranteeing the contract cannot hide behind the failing company, meaning that your debt will still be recoverable from those guarantors despite the insolvency of the company you were trading with;
- When an individual is personally liable to being sued, they are often more inclined to pay your debts, as failing to do so can have dire consequences such as:
- receiving a court judgment against their name;
- obtaining a poor credit score; or
- in more extreme cases declaring bankruptcy;
- You may also gain access to valuable assets to secure your debt against, such as any real estate the guarantor personally owns. This lowers the risk of not recovering your debt and provides you with peace of mind when trading with that entity.
When can a personal guarantee be used?
A personal guarantee can be incorporated into almost any commercial agreement, including but not limited to:
- Trade and supply agreements;
- Loans and other financing arrangements;
- Sale contracts for land, business, shares, or any other property; and/or
- Building and construction contracts.
The need for legal advice
If a personal guarantee is incorrectly prepared or inappropriately disclosed to the guarantor, it may be rendered legally unenforceable. To ensure your personal guarantee is enforceable and binding on a guarantor it is essential that you engage a commercial lawyer to prepare the guarantee for you.
A personal guarantee is just one example of the many tools available to a business to secure the performance of its contracts. If you operate a business and are concerned about your level of security when contracting with other entities, please do not hesitate to contact the commercial team at Long Saad Woodbridge Lawyers.
Important Disclaimer: The content of this article is general in nature and for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.