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At MBM Commercial we are the industry leading experts at advising clients on all aspects of Scottish Personal Guarantees and have a strong track record in helping clients navigate their way out of them.

We have successfully helped our clients avoid paying over £2million of personal debt due under personal guarantees.

This page will help you understand what a personal guarantee is and how we might be able to help you avoid your liability under them.

What is a Personal Guarantee?

A personal guarantee is an agreement that means an individual takes personal liability for his or her company’s debts in the event that they cannot be paid back by the company itself.

Lenders often use them as an added level of security to make sure that they will get their money back if the business can’t pay and are commonly included in or alongside any loan documentation.

Personal guarantees can be called on as soon as the business is unable to pay and lenders do not need to wait until any administration or liquidation is completed before asking a guarantor to pay up.

If a lender calls in a personal guarantee and you can’t pay, then this could lead to you being made personally bankrupt.

Ways Out

There are a range of grounds that we at MBM have used to help people out of a personal guarantee.

Misrepresentation - 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.

Economic Duress - 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.

Duty of Good Faith – in some banking relationships it may be possible to argue that a duty of good faith exists. This is an argument that can be advanced where there has been a long standing and close relationship between the business and the bank, and where the bank in reality provided advice to the business. In these circumstances it can be argued that a duty to act in good faith has been created, and if the bank, in its actings towards the business, has breached that duty, 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 towards the business. 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.

Promise - 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.

Error - 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. 

Force and Fear – if the individual was induced to sign a personal guarantee in circumstances where he or she is placed under “force and fear”, whether by the bank or by a third party, it can be argued that the guarantee is void. Examples include the situation in which a husband owns and runs a business, but through threats, intimidation or abuse, persuades the wife to guarantee the debts of the company. In these circumstances the wife has not freely and voluntarily given her consent to the personal guarantee, and it matters not that the bank may have been unaware of the circumstances in which the wife came to sign the guarantee document: the abusive conduct of the husband was such, it can be argued, to overpower the wife’s will.

Prescription -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.

Contact our Financial Disputes Team Edinburgh, Scotland

If you think that you may be subject to a personal guarantee or would like some advice regarding navigating your way out of one, then please do not hesitate to contact a member of the Financial Disputes Team on 0131 266 8200 or fill out our online enquiry form.

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