Affects of Personal guarantee contract

An indemnity is a promise of assurance to be responsible for another loss and to compensate on the agreed terms. Indemnity creates the principal nature of liability.

There are three parties involved in the contract of guarantee such as the surety, principal debtor and the creditor. While there are two parties involved in indemnity such as indemnifier and indemnity holder.

It was held in “Yeoman Credit Ltd v Latter (1961)” that an indemnity is a contract by one party  to keep the other harmless against a loss.

What is a personal guarantee?

A personal guarantee is usually required by the lender when a business requires a loan and does not have other assets to secure the loan. A personal guarantee is a legal document that secures the loan of company against individual assets. The guarantor is liable to perform his obligation when the company fails to do so.

In fact a personal guarantee is a legal undertaking by an individual to pay the loan when borrower fails to do so. Mostly banks require the personal guarantee from such businesses those have no previous credit record. Personal guarantee creates the problems for both sides when enforcement occurs.

Legal Requirements

Statue of Frauds (Ireland) 1695 requires that guarantee must be in written form and must be signed.

It was held in case Bank of Ireland VS McCabe that a verbal renewal of guarantee is not sufficient.

Importance of Personal guarantee

A guarantee is a contractual right that creates a right in personem. There is no restriction on the assignment of guarantee of indemnity if the prior consent is obtained from the party or as agreed between the parties in contract. If the agreement is silent or does not allow the assignment then the guarantee or indemnity can be assigned.

Reasons for personal guarantee

The personal guarantee is required when the business is new and has new pervious credit record. Mostly the entrepreneur i.e. the director of the company provides the personal guarantee to repay the loan if the company fails to do so. Personal guarantee can be limited and unlimited.

Legal affects on Personal guarantee

The Financial regulator has issued two mandatory code of conducts in 2009 with reference to Business Lending to Small and Medium Enterprises and Mortgage Arrears which minimize the freedom of lender to enforce personal guarantee over personal private residence.

Tips for guarantor

The guarantor must read the entire contract before signing it and must understand his nature of liability. Because once the contract is signed; t becomes a legal contract . Therefore the guarantor must consider the following points before singing the agreement. Such as:

The Guarantor must obtain the independent legal advice before signing the agreement.The guarantor must know and understand about the nature of secured liabilities.

Net Lawman provides the following types of personal guarantee document . Such as:

Guarantee of contract debt

This is a supplementary contract that brings in a guarantor to a situation where the client of a provider of a service or supplier of goods has failed or is likely to fail to make payment when due. It can be used with any performance contract and can add a personal guarantee for an individual, or bring in another party, such as a business. The key benefit of this document is that the original contract remains unchanged, making this a neat solution to adding a guarantor

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