Recent media reports highlight increased enforcement by banks of their security where loan repayments are not forthcoming.  In the property boom, personal guarantees (“PG”s), given by directors of development companies to support the companies’ borrowings, often formed part of such security.

A PG is a legal undertaking by an individual to repay a loan advanced to a borrower, usually where the borrower is unable to make its repayments. For the bank, the PG gives an additional avenue to recover the money owed to it, while the guarantor (often a director), by providing the PG, is able to obtain loans for his company which might not otherwise be advanced.

PGs hold complications for both sides and often these complications emerge when enforcement occurs. 

Some key issues include:

• Independent legal advice: As the guarantor’s interests differ from those of the borrower company, each guarantor should ensure that he receives independent legal advice and has the PG and his resulting liabilities explained to him by a qualified solicitor other than the borrower company’s solicitor.  The bank should ensure that it has recommended in writing that independent legal advice be obtained, and should seek either a written confirmation from the guarantor that such advice was received, or that the right to independent legal advice was waived. In the ongoing case of Ulster Bank v O’Neill, the High Court ruled that a developer’s wife who gave a personal guarantee has an arguable defence because she never received, nor was she advised by the bank that she should receive, independent legal advice.
• Consideration: For a PG which is simply signed (but not sealed) by a guarantor to be effective there needs to be valuable consideration by both parties. Consideration can be a nominal amount, for example, €1. For a PG which is executed as a deed no consideration is required. It is advisable that a bank ensures each PG is properly executed by the guarantor as a deed with an appropriate signature block, and a witness to the signature, to avoid having to show that consideration was present. 
• Secured liabilities: A guarantor should be clear as to exactly what debts of the borrower company he is guaranteeing. PGs can be “all monies”, i.e. all sums present and future owing by the borrower company to the bank, or to cover “specific liabilities”, for example, all sums due by the borrower under an identified set of finance documents. The guarantor’s liability can also be “capped” so that the guarantor will only be liable for a specific amount (although the guarantor will usually also be required to meet related costs and expenses and interest).  While banks will ordinarily ask for all monies PGs, a guarantor should negotiate that a cap is applied.
• Family home: Often an individual’s most valuable asset will be his family home.  If payment is not forthcoming under a PG, a bank may seek the sale of the family home of a guarantor in order to recover the money due.  Where possible, a guarantor should seek to get a written confirmation from the bank that its recourse under the PG will not extend to the family home of the guarantor. Such confirmation will usually be given by banks where the guarantor has other assets of value at his disposal.

A number of other common pitfalls in PGs are emerging which emphasise the need for banks to review their standard form PGs and that certain PGs may turn out not to be enforceable.