Personal Guarantees - Independent Legal Advice

Posted on: 25/07/2023

Category: For your business

Often when obtaining borrowing for a transaction the lender may require a personal guarantee from a third party, i.e. a director or shareholder of a limited company. Our role is to give you reasoned advice for you to decide if you wish to enter into a personal guarantee knowing the risks. The House of Lords has stressed that the process is not a mere formality, as it is an important task to be carried out by the advising solicitor.

The requirement for independent legal advice is due to a series of cases, and in particular that of Royal Bank of Scotland vs Etridge 2001. These cases examined the enforceability of security where borrowing was obtained by the undue influence exerted by one party on another. Undue influence occurs when a party exerts pressure or influence on another, causing them to make a decision that they would not have made independently.

This particular case involved bank borrowing by a husband to inject into his business where the wife, as a co-owner of the matrimonial home, was asked to sign the lending documentation which put the home at risk when the business failed.

Following Etridge lenders require a guarantor to obtain independent legal advice to avoid the lender’s security being unenforceable, if the guarantee is obtained by improper pressure, coercion or unacceptable conduct of another.

So what's involved?

We need to see all bank documentation and, in most cases, will be instructed by both the lender and the person entering into the guarantee.

We need to read the underlying lending documentation to which the guarantee applies to see in what circumstances the guarantee may be called upon. It is for us to explain how the guarantee can be enforced and under what circumstances, and usually to what financial level so that the guarantor can take an educated decision as to whether it’s a level of risk acceptable to them.

Once we have read through the documentation, we would wish to meet the guarantor face to face and on their own to ensure that there is no undue influence and the independent advice given has been understood. A letter of advice will be produced confirming advice given.

We will ask the guarantor to confirm that they have received and understood the advice and then we are able to provide the solicitors certificate to the lender.

The signed guarantee and solicitor’s certificate is then returned to the lender in accordance with their instruction.

Can one Solicitor act for all parties?

We are often asked if we can act for all parties on the same transaction. The answer to this is, it depends.

We would first need to check that the lender is prepared for us to act for everyone and then we need to consider whether there is any conflict of interest under our professional conduct rules which would prohibit us from acting for all parties. We acknowledge that it is sometimes more cost effective for us to act for all parties, but we will only do so if confident that this does not compromise our professional conduct rules.

Why face to face meetings and not Teams/Zoom?

Due to the nature of the advice and guidance under Etridge, the best practice is that the advice is given face to face because this is the only real way to ensure that we are satisfied that there is no undue influence. There has been some relaxation as a result of Covid, but now that people are meeting face to face, it would always be wise to adhere to the principles of Etridge.

We have noticed an increasing demand for funding to be secured through a personal guarantee which requires independent advice. They do put your personal assets at risk.