Independent Legal Advice Explained: Part 2 – Personal Guarantees

Welcome to part two of Backhouse Solicitors’ three-part series, Independent Legal Advice Explained, where we provide an overview of independent legal advice, including ID1 forms, personal guarantees and joint borrower sole proprietor arrangements.

In part one, we explored ID1 and ID2 forms. In part two, we focus on personal guarantees and what they can mean for business owners, directors and individuals who are asked to provide one.

We explain what a personal guarantee is, when it may be required, the risks involved, and why the right legal support is essential to help you make informed decisions before signing.

A personal guarantee is a legally binding promise made by an individual, usually a director, shareholder or business owner, to repay a debt or meet an obligation if the business itself is unable to. It makes you personally responsible for a business debt or obligation, which means your own finances and assets could be at risk if the business cannot meet its commitments.

In practice, this means that even if a company is a limited company, the lender, landlord or creditor may still be able to pursue the individual who signed the guarantee if payments are missed or obligations are not met.

Personal guarantees are commonly requested where a lender or other party wants additional security. They are often used when a business is new, has limited trading history or does not have sufficient assets of its own.

Examples of where you may come across a personal guarantee include:

• Business loans and overdrafts
• Commercial leases
• Trade finance and supplier credit agreements
• Asset finance and hire purchase arrangements
• Start‑up or early‑stage funding

Signing a personal guarantee is not something that should be treated as a formality. If the business cannot meet its obligations, the person who signed the guarantee may become personally responsible for the debt, and that can put savings, property and other assets at risk.

Some of the risks can include:

• Personal liability that may be unlimited
• Being pursued for the full amount if more than one person has signed
• The possibility of action being taken against personal assets
• Enforcement without the creditor first exhausting all options against the company
• Difficulty challenging the guarantee once it has been signed

It’s easy to assume that a personal guarantee is just another document in a wider transaction, but that can be a costly mistake. People often believe that:

• The guarantee is time‑limited
• Liability only arises if the company becomes insolvent
• The guarantee can be easily withdrawn
• Enforcement will always be a last resort

In reality, a guarantee’s wording is often broader than expected, which is why it is important to have it fully explained before signing.

In some cases, yes. Before a guarantee is signed, there may be scope to negotiate certain terms depending on the commercial circumstances and the willingness of the lender or other party. For example, it may be possible to ask for:

• A cap on financial liability
• A fixed duration
• Release upon refinancing or repayment milestones
• Proportional liability rather than joint exposure
• Removal of security over personal assets

That said, negotiation is often limited in practice, particularly where a bank or lender is using its standard form documents. Even where changes are not possible, understanding the extent of your liability before signing remains essential.

Lenders and landlords will often insist that anyone signing a personal guarantee takes independent legal advice first. This is not just a box-ticking exercise. It is intended to make sure the person signing understands the document and the consequences of it.

A solicitor providing independent legal advice will explain what the guarantee means, when liability may arise, whether it is limited or unlimited and how it could affect your personal finances.

From the lender’s perspective, independent legal advice reduces the risk of the guarantee being challenged on the basis that it was not properly understood. The advice should be obtained before the guarantee is signed and from a solicitor who is acting independently of both the lender and the wider transaction.

If the guarantee is called upon, the creditor may take action directly against the person who signed it. This can include:

• Court proceedings
• Charging orders over property
• Statutory demands and insolvency action
• Long‑term damage to personal credit rating

If enforcement is threatened or has already started, obtaining legal advice as early as possible can make a significant difference.

If you have been asked to sign a personal guarantee, taking advice beforehand can help you understand the risks and avoid unexpected consequences later. Our Corporate and Commercial team are here to help. To find out more about independent legal advice for personal guarantees, contact the experts at Backhouse.

Tel:      01245 893400 | 01702 410880
Email: info@backhouse-solicitors.co.uk
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