Guarantors – Some Considerations
Q. We are a finance house who entered into a commercial hire agreement with a new company who needed to acquire plant and equipment. It was a condition of the agreement that both directors gave their personal guarantees. Now the company has collapsed and one of the directors has already gone bankrupt. The other one is saying that he never saw the form and it is not his signature. We thought we had security but now we are contemplating a huge write-off. Could we have done anything more to protect ourselves?
A. Any form of lending to a limited company always comes with the risk that if the company fails then nothing owed may be recovered. Therefore it is always prudent to secure that lending with whatever tangible security may be available. A personal guarantee from a director or some other supporter of the business can provide some comfort but there are certainly steps that you can take at the time of preparing and giving the guarantee which can help maximise the value of that security.
A personal guarantee is worth no more than the guarantor. So what is he worth? Make enquiries. Ask him directly about assets and other liabilities. Does the guarantor have any property over which you can take a charge to support the guarantee. If he has been giving personal guarantees to other lenders then that may diminish his ability to honour yours.
In your case, it is likely that the bankrupt director gave other guarantees or commitments beyond his worth. Therefore, when you came calling, there was already nothing left.
Your other concern is a director who is denying that he has signed the guarantee. In some cases the question of whether a signature is that of the named guarantor can be determined by a forensic handwriting expert but there are steps you can take, at the time that the guarantee is given, which should preclude such allegations being made.
Simply sending personal guarantee forms to a company and asking them to return them signed and completed is providing scope for abuse.
There are not many formalities to a guarantee but, even so a surprising number of guarantees fail. For the guarantee to be binding on the guarantor it must be in writing and signed personally either by the individual or his authorised agent. Therefore, make sure that is what happens. Invite any guarantors to sign the document in person at your office and ensure that a witness is present when they do so. The witness will then confirm that by also signing the agreement. If for any reason the guarantor cannot attend at your office then make sure your representative visits him and, again, witnesses the guarantor’s signature.
Remember, if a director is not willing either to give a personal guarantee or to pledge property in support of that guarantee then he is asking you to have a confidence in his company’s prospects greater than his own. Why should he sleep easier than you?