Enforcement of personal guarantees: What to know

On Behalf of | Dec 5, 2023 | Contract Disputes

A personal guarantee is a commitment by an individual to take responsibility for a business’s debt or obligation in the event that the business entity itself is unable to fulfill its financial commitments.

A personal guarantee is a legally binding agreement within which an individual pledges to repay a business debt or fulfill obligations on behalf of the business. This is often required by lenders or creditors, especially when dealing with small businesses, startups or companies with limited credit history. By providing a personal guarantee, an individual essentially becomes a co-signer or a backup for the business’s financial commitments.

How can a personal guarantee be enforced?

The enforcement of a personal guarantee typically occurs when the business is unable to meet its financial obligations, such as repaying a loan or servicing a debt. 

In such cases, the creditor may seek to enforce the personal guarantee to recover the outstanding amount. Enforcement can take various forms:

  1. Demand Letters: The process often begins with the creditor sending a demand letter to the personal guarantor. This letter outlines the amount owed, the terms of the personal guarantee, and a request for payment within a specified timeframe.
  2. Legal Action: If the personal guarantor fails to respond or refuses to comply with the demand letter, the creditor may pursue legal action. This could involve filing a lawsuit to obtain a court judgment against the guarantor.
  3. Asset Seizure: With a court judgment in hand, the creditor may have the authority to seize the personal guarantor’s assets to satisfy the outstanding debt. This can include bank accounts, real estate or other valuable possessions.

These may not be the only options, but they’re a good starting point.

What sort of defenses can be raised by the guarantor?

It’s probably no surprise that many people who willingly put up a personal guarantee never actually expected to have to make good on their promise. They may often raise defenses to avoid the obligation, including things like:

  • Fraud or Misrepresentation: If the personal guarantor can demonstrate that they were induced into providing the guarantee through deceptive practices by the creditor, this may be a valid defense.
  • Unconscionability: Unconscionability refers to contracts that are so tilted toward the favor of one side or so blatantly oppressive that they are unfair. If a personal guarantee is deemed unconscionable, a court may refuse to enforce it.
  • Lack of Consideration: A personal guarantee, like any contract, requires consideration (something of value exchanged between the parties) to be valid. If the guarantor can show that they did not receive adequate consideration for providing the guarantee, it might be challenged.
  • Breach of Contract by the Creditor: If the creditor has breached the terms of the underlying agreement or the personal guarantee itself in some way, the guarantor may have grounds for defense. 
  • Illegality: If the purpose or terms of the underlying contract or personal guarantee are illegal or against public policy, the court can refuse to enforce it upon those grounds.
  • Ambiguity or Vagueness: If the terms of the personal guarantee are unclear, ambiguous or vague, it may be challenging to enforce. Courts often interpret contracts against the party that drafted them, particularly if the terms are not clearly defined.
  • Duress or Undue Influence: If the personal guarantor was forced into providing the guarantee under duress or undue influence, such coercion can serve as a defense.

Again, this is not an exhaustive list, but it does convey some of the complexities involved in enforcing a personal guarantee. When you are approaching this kind of problem, legal assistance can make the process much easier.