Author Rob Adams

Issue September 09

Pub EADT

With recession continuing to bite, cash flow and recovery of debts remains of critical importance to all businesses and as always, prevention is better than cure. Firms are looking ever more closely at their customers and the people with whom they do business, to assess their viability and credit rating.

There are certain circumstances where the trading relationship is perhaps unequal; in other words the customer needs your goods / services more perhaps than your firm requires their business.  In these situations thought should be given to requesting personal guarantees from directors of your customers. They do not have to agree, but if they do, the guarantee provides additional security against a possible bad debt, as it would allow you to enforce that debt personally against the director.

The banks often use personal guarantees, but there is no reason why you cannot use them in the course of your business.  At its simplest, a personal guarantee must be in writing, dated and signed if it is to be enforceable.  These documents can be drafted quickly and are an extremely cost effective way of adding another layer of protection into your dealings with that particular customer.

The great advantage is the alternative route of enforcement it allows you to pursue if the deal turns sour.  You can seek to pursue the company, but also exercise remedies personally against the director who provided the guarantee. This can be perhaps by placing a charge on their property, freezing their bank accounts or petitioning for their bankruptcy. The fact that a personal guarantee is in place is a significant incentive for that director to see that your bills are paid first.

If you are on the other side of the fence, and have entered into personal guarantees or are being asked to do so, remember to seek to limit the extent of the guarantee. It is worth taking legal advice on the implications of giving such a guarantee and being certain of exactly what you are committing yourself to.

If you have given guarantees on behalf of a company which you are looking to exit, then remember to serve notice in the appropriate form to terminate your personal guarantee, prior to your departure to prevent any nasty future surprises.

Seeking personal guarantees from customers is not always easy or desirable but it is an option to bear in mind, to be used when circumstances allow.

Rob Adam

Partner & Head of Dispute Resolution

Tel: 01284 762331

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