In the current economic climate, it is very difficult for Scottish individuals and small companies to obtain bank loans or overdrafts. Often when a bank is prepared to loan money to the borrower, they will demand that a creditworthy guarantor (usually one or more company directors) signs a personal guarantee which then entitles the bank to recover a fixed sum of money from the guarantor should the borrower fail to repay the loan.
Unfortunately over the last few years many companies, particularly those involved in the commercial property market, have fallen victim to the credit crunch as their cash flow has been squeezed by an increase in bad debt and decrease in available credit. A large number of these companies’ debts were guaranteed by unfortunate directors and when the companies went under then the bank turned to the directors for recovery of the money they had guaranteed.
Generally speaking, when the personal guarantee is “called in” by the bank, the director does not have funds available to settle the amount the bank is seeking. The consequences of the personal guarantee being enforced by the bank are often dreadful with not only the director’s house being sold but even worse, the director being formally declared bankrupt.
However all is not lost if a personal guarantee is called up, there may be a way out of it! We have summarised our six potential escape routes for personal guarantees governed by Scots law below:
Before signing the bank’s personal guarantee, the bank said or wrote something false which you relied upon and that induced you to sign the guarantee. In other words, but for the bank’s false assurance about something, you would not have signed the guarantee.
If the bank put extreme pressure on you to sign the personal guarantee then a judge may decide that by the bank’s actions, you did not consent (despite signing the guarantee) and the personal guarantee is void and cannot be enforced against you. If you were left with no practical choice but to submit to the economic pressure from the bank then this remedy may be of assistance to you.
If the bank is aware that you signed the personal guarantee thinking that, for example, a certain thing will happen or that the guarantee would not be enforced in certain circumstances but this is not in fact the case and the bank does not tell you that you are mistaken then the duty to act in good faith may render the personal guarantee unenforceable.
The duty is quite broad and may cover any acts of bad faith by a bank. For example, if your bank is the main instigator of the collapse of the company or person that borrowed the money, then by acting in an unfair manner, the personal guarantee may be held to be unenforceable by a court.
If the bank used clear words either in writing or verbally that it will unequivocally not enforce the personal guarantee for a certain period of time or until something is done then a legally binding promise may have been created which could be relied upon to defend enforcement proceedings brought by the bank.
A unique feature of the law of promise in Scotland in contrast to England is that a promise is legally binding even when the person making the promise receives nothing in return from the other person. So while in England a bare promise from a bank not to enforce the personal guarantee would not be binding, the promise would be binding if made north of the border.
If the personal guarantee was signed on terms which, by mistake, do not reflect the agreement between you and the bank then it can be argued that there is no agreement due to error. However it seems that the current law in Scotland is that for the personal guarantee to be rendered void and unenforceable there must not only be error but also some other factor such as the bank acting in bad faith.
The personal guarantee expires 5 years from becoming enforceable at which time it can no longer be enforced by the bank. This is not 5 years from signing the personal guarantee but from when the bank calls in the debt. The exact time when the guarantee became enforceable is open to dispute.
If you are concerned about a personal guarantee you have given a bank or other creditor then please do not hesitate to contact us to see if we can help you. We have identified various legal remedies which may be available to you depending on your circumstances.
We understand how stressful it is when a personal guarantee is called in. We have experienced and talented lawyers with expertise in this area who can calmly and confidently guide you through the legal process to achieve the best outcome possible in the circumstances.
Our track record speaks for itself; we have not only helped clients negotiate and secure significant discounts on their personal guarantee liabilities but we have also been able to prevent the bank from enforcing the guarantee with the disastrous consequences that may follow such as the forced sale of the director’s home and bankruptcy.
If you need our help, please call 0131 226 8200 and ask to speak to one of our solicitors in the financial disputes team. Before giving us a call, please check your governing law clause of the Personal Guarantee is Scots law.
Disclaimer: While every effort has been made to ensure the accuracy of this blog post, it is not intended to provide legal advice as individual situations will differ. No recipients of content in this blog post should act or refrain from acting on the basis of the blog post without seeking the appropriate legal advice on the particular facts and circumstances at issue from a qualified solicitor in their jurisdiction. The blog post is for general information only and is not legal advice. The law changes frequently and varies from jurisdiction and jurisdiction. No solicitor-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with a solicitor qualified to practise in your jurisdiction. Should you be interested in seeking our assistance with a legal matter, please contact the Dispute Resolution team on 0131 226 8200.