Mention personal guarantees and I’m likely to break out into a cold sweat. I have a similar reaction when confronted by cauliflowers, both related to traumatic experiences from childhood. The timeline of my cauliflower lachanophobia is difficult to pinpoint but not my PG anxiety, which originated in 1974 and the year my father was made bankrupt due to his being called in.
The seismic impact of that event on my family has left a lasting impression and a residual resistance to do all you can to avoid signing one.
The problem is that people don’t expect the worse to happen, particularly during the heady days of launching or growing a business. Their impact can be overlooked in the rush to raise finance and grow the business. In the event that you think it’s the only way you can get someone to hand over money or goods, think first through every other alternative;
– Do you need as much as you think? Are there other ways of raising the finance without putting your property on the line?
– Do you have other assets you can offer as security?
– If it’s a landlord requesting a PG, is it possible to negotiate a deal away from that measure, perhaps to provide a larger deposit?
– If you have to offer a PG, make sure you at least cap the amount to be repaid
– Have other directors agreed to the same measure and what assets do they have? Do they have the same amount at risk?
– Don’t sign a PG without first telling your family and making them aware of the risks. Is it absolutely necessary for you to raise this money and/or agree to a PG?
All of this is worrying enough when you know what you’re getting yourself into. What about a situation where you have no idea? Yikes, it’s enough to make me hide behind a sofa.
I was alerted to this potential scenario via a blog written by Robin Millar from www.businesslaw.co.uk in Scotland, entitled ‘beware of the unwitting personal guarantee’ …. directed by Alfred Hitchcock (actually, that last bit is made up). Robin has been kind enough to allow me to reproduce his article as it contains some useful information …
“I was reminded of a case in 2010 that involved a situation where a director ended up giving a personal guarantee for a trade debt without ever knowing he had done so.
What was that case about?
In 2000, the court made clear that a personal guarantee in a contract is something which is not unusual, but if it is to be included, fair notice of it must be given to the person giving the guarantee.
In the more recent case, a director signed a standard form contract [for plant hire] which included a section headed “guarantee” which went on to state that the person signing undertook to make full settlement of any money due to the supplier and stated that the signatory was giving a personal guarantee of the debt and all related costs. This section had a box for the director to sign.
What did the court say?
The argument presented to the court was that the director signed only as a director of the company and not in a personal capacity. The court said however that the use of the heading “ guarantee” and the fact that the detailed wording used the term “personally guarantee” was sufficient notice that the director signing was also undertaking personal responsibility and that by signing that section he must have been agreeing to bind himself personally.
What does it mean for you and what should you do ?
The effect of this case depends on whether you are the customer or the supplier.
If you are being asked to sign any standard form contract on behalf of the company it is essential that you take time to read the document you are signing carefully. If you see a section headed “Guarantee” or “Indemnity” or see those words anywhere in a standard form contract DO NOT SIGN unless you are absolutely sure that you are prepared to accept personal liability.
If you are the supplier, it does mean that it is not difficult to tie in a director to personal liability and, where you are dealing with a small company, it is well worth considering in the current climate. We will be happy to discuss how you can set up your terms and conditions to allow you to do this”
If you’re facing a PG in Scotland and want legal advice, you could do worse than get in touch with Robin and his team at www.businesslaw.co.uk
For me, the only blog Robin could write that might make me more nervous is ‘Beware of the unwitting cauliflower’!
Andrew Weaver is an entrepreneur, investor, mentor, blogger and Cranfield MBA. Brought up in Cornwall he has since worked in cities around the world including Melbourne, Cairo, Bilbao and London. He has extensive knowledge and experience within the SME sector across a wide range of sectors including professional services, property, distribution, leisure. He was also once a barristers clerk and has incorporated this wide range of experience into the recent launch of LawyerFair, a free to use legal comparison service aimed at increasing choice and competition in legal services. He is particularly interested in how technology and the internet will drive better value from professional services. With a Spanish partner and young daughter, he splits his time between London and Bilbao – including regular trips to San Mames and the home of Athletic Bilbao.