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In commercial transactions, personal guarantees are standards in business practices. However, most times, they are misunderstood and can pose great risks. It is an agreement one party has to answer for default, debt of miscarriage of another partner. Even though it is good to recover and collect debt, it is also a huge responsibility for the person signing the agreement. It holds a particular party responsible for any debt unpaid, even when the entity or the company being represented is now insolvent. Have it at the back of your mind that the only instance a release from such agreement can happen is after you have gotten consent from the lender or creditor and potentially the organization or person, depending on the kind of obligations laid.
Personal Guarantee Risks you should be aware of:
1. Be aware that most guarantees now contain clauses which make it possible for the credit provider to take control of every property a guarantor might have, in addition to lodging a caveat.
2. The creditor has the right to personally get a judgment against you in court. If the judgment is gotten, he/she is entitled to make use of standard enforcement procedures. There is no connection between the agreement and any particular asset, so all assets you possess can be available for the court to seize and sell.
3. Have it in mind that the inability to maintain a good relationship with the company doesn’t lead to the automatic termination of the guarantee, even if the guarantee was a personal one the director signed, and you no longer hold the role, or the organization has gone into liquidation.
4. Note that the guarantee continuing does not depend on time. You can be held responsible for any obligations the company owned, whether past, present, or future. The company can pay the debt at a provided date, but you will be responsible for all subsequent indebtedness by that company.
Other things you should consider are:
• The extent of the guarantee:
Look at the total amount that has to be paid under the guarantee and review any other costs that may be included in the debt. For instance, the content of the form may include amounts which may be claimed by the guarantee, such as legal costs, mercantile fees and interest.
Such costs can significantly exceed the real amount.
• The release of the guarantee:
Releasing the guarantee will depend on the type of agreement made. In some cases, the guarantee will not be released until after the full repayment of the amount or the expiry of the lease. On other instances, the guarantor may successfully negotiate the release of the agreement. As a director, you should be aware that ending the relationship with an organization does not end a guarantee automatically. As a guarantor, you must get the consent of the lender, and potentially the company, to be released from the agreement.
• Dealing with more than one guarantor:
In scenarios where there is over one guarantor, the parties may accept a joint or several liabilities for the debt. This kind of liability may hold both or one guarantor liable for the debt. It can hold one guarantor responsible for paying all the debt if the other guarantor fails to meet their obligations. Also, creditors may selectively enforce the debt of one guarantor.
• Understand the wordings of the guarantee:
Think about the consequences of the terms you’re signing up for, and remember that each guarantee is different. The terms will also dictate whether it is unsecured or secured, and what debts can be claimed. For instance, a guarantee termed all moneys’ mean that you will be liable for all the obligations and debts of the company.
• Take note of legal and financial consequences:
Ensure you understand who you are giving the personal guarantee on behalf of and the probability of the company or person not being able to repay the debt. Carefully go through the contract and get independent advice before signing to understand the extent, limit and impact of the guarantee. Learn about how far personal guarantee insurance reaches and the impact it can bring to your business. After reaching a decision, ensure you have an extra copy for your personal records. Avoid signing such agreements for family members, or businesses you are not involved in its daily running because the risk will lie with you eventually.
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