Personal Guarantees and Standard Securities in Scotland: What you need to know

It is becoming increasingly common in Scotland for lenders to ask company directors to sign a personal guarantee when their company grants a standard security over property.

While this is becoming a routine requirement, signing a personal guarantee has serious legal consequences and must be considered carefully and fully understood before signing as it can put your personal assets at risk if your company cannot meet its obligations under the terms of the loan.

What Is a Personal Guarantee?

A personal guarantee is a legally binding documents signed by an individual (Guarantor) to repay another’s debt if that person or company fails to do so.

In the context of business lending and with lenders being more cautious about risk, a personal guarantee is often required where:

• A limited company is taking out a mortgage or loan, and
• The lender wants an individual (typically a director) to guarantee the company’s obligations.

The aim is to protect the lender in the event that a company fails and allows the lender the ability to recover funds from the guarantor in this event and gives the lender the ability to recover funds form the guarantor’s personal assets.

The security itself gives the lender the right to call up the security in the event of any default and repossess the property to repay any outstanding borrowing. If such sale does not cover the outstanding loan, the lender can pursue the guarantor personally for any shortfall and including all legal fees, court fees and other associated professional costs.

Before signing a personal guarantee, you should always seek independent legal advice from a solicitor who is not acting for the lender or the company.

Before signing a personal guarantee, you must ensure you fully understand:

1. The extent of your liability,
2. The risks involved, and
3. The possibility of limiting or negotiating the guarantee’s terms. It is preferable to agree a cap on the extent of the guaranteed amount and/or a time limit on the term of the personal guarantee to restrict exposure if at all possible.

What might appear to be a standard condition of a loan is, in reality, one of the most serious personal financial commitments you can make as this gives the lender the right to pursue you personally for your company’s debts and so you must fully understand the extent of your obligations before signing a personal guarantee.

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The information and opinions contained in this blog are for information only.  They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice.  Before acting on any information contained in this blog, please seek solicitor’s advice from Gilson Gray.