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Never Personally Guarantee a Corporate Loan Without Legal Advice
Providing personal guarantees as security for corporate loans is for many businesspeople simply a price that has to be paid to achieve commercial success. As a High Court case showed, however, signing such a document is a momentous step that should never be ventured without first taking professional advice.
The case concerned an entrepreneur who personally guaranteed loans advanced to a company, which he was a director of, in order to fund a promising overseas project. The hoped-for success did not materialise and the company entered administration and was ultimately dissolved. The lender subsequently launched proceedings to enforce his guarantee, seeking almost £2 million, plus interest and costs.
The guarantee stated in terms that, if he ceased to be a director of the company for any reason other than ill health, death or by mutual agreement, a significant event would be deemed to have occurred and his obligations under the guarantee would be automatically triggered. There was no dispute that he ceased to be a member of the company's board of directors at the moment of its dissolution.
In resisting the lender's claim, he argued that the terms of the guarantee were far from unambiguous and that the lender's interpretation of it defied common sense. He asserted that the guarantee could not be triggered by an event of insolvency and that all concerned had intended that it would only become enforceable if he chose not to remain focused on serving the company and contributing to its success.
The Court, however, found that the guarantee's definition of a significant event was clear. It provided that, other than in narrowly defined circumstances, the guarantee would be triggered if he resigned or ceased to be a director for any reason. There was no requirement of fault on his part and, had it been the intention to exclude enforcement where he had ceased to be a director as a result of liquidation or dissolution, that could easily have expressly been provided for. The guarantee having been triggered, the lender's claim was upheld.