I recently attended a consultation with a client who had brought along a personal guarantee signed in favour of a Bank.
He explained that the Bank had called this up and that they would be seeking to enforce it against him.When passed the guarantee I immediately flicked to the back page and found the clause I was hoping not to see:
“This agreement shall be registered for preservation and execution”
These words may seem innocuous, but they in fact gave the Bank a very powerful right of relief against the guarantor, almost giving them a shortcut to a Court Judgement for the sums contained within the guarantee. It is a clause unique to Scotland.
Indeed another client of MBM referred to this wording as “the Devil’s agreement”!
The ability to lodge a document for preservation and execution means it can be registered by either party in the Books of Council and Session (part of the Registers of Scotland). The preservation part refers to keeping the original safe. The original document is kept by the Register and the party who lodged it is provided with an extract copy.
The execution part is where the danger lies. In the event that the personal guarantee is called up, the Bank can simply hand the extract copy to a Sheriff Officer for execution. The Sheriff Officer is permitted to carry out enforcement action against the guarantor as if they held a court judgement against them. This is commonly called summary enforcement and it often ends with the guarantor being declared bankrupt by the Bank.
This clause is also commonly found in other documents, not just personal guarantees and loan agreements. It frequently crops up in leases for example.
Summary enforcement can be halted, but there is usually a very short period of time in which this can be done. It also requires the guarantor to have a legitimate reason as to why the sums contained within the guarantee are not due or are incorrect. It can also be halted where there are any serious technical errors in the guarantee document itself. For more information on this topic, please see Neil Morrison's blog post here .