Liability Under A Personal Guarantee

Author:Mr Joe Gavin
Profession:LK Shields Solicitors

The most important thing to realise about guarantees is that

when it comes to payment, the liability of the guarantor will

include the unpaid principal and interest which continues to accrue

at a compound rate of interest.

Compounding of interest means that interest is added to

principal annually and interest continues to accrue on the sum of

both. Over time, the result of compounding of interest means that

the amount of interest owing may well exceed by several times the

original amount of the loan.

The longer the loan remains unpaid, the greater the effect of

compounding and the greater the liability of the guarantor, which

continues to grow at a compound rate until discharged.

It is usual for banks lending to developer borrowers to request

personal guarantees from the personal owners of the development

company borrower.

This practice is widespread and is regarded as "additional

security" for the loan and has several attractions to lending

banks. Firstly, the personal guarantor becomes a mark for repayment

of the loan. Secondly, it ties the guarantor into personally

managing the affairs of the borrower so as to limit his credit

exposure to the Bank. And, thirdly, it helps to secure the

Bank's ability to trace realised profits from the underlying

commercial transaction in the hands of the personal guarantor.

The value of a personal guarantee is directly related to the net

worth of the individual who has agreed to give the guarantee and so

the law requires particular formalities to be observed by the

person giving a guarantee so as to impress the personal nature of

the obligation incurred by providing a guarantee.


To recover under a guarantee, a bank must first obtain judgment.

However, it is one thing to have indebtedness declared by the

court; it is another thing entirely to recover money from the

judgement debtor. It can often be the case that on securing

judgment, it is discovered that the judgment debtor has no

available assets under his control against which the judgment debts

may be enforced.

There are a number of enforcement procedures open to banks and

the available options include:

Registration of a judgment - the bank can register the judgment

in the High Court. Upon registration, it will generally be listed

in any judgment search which is carried out against the individual

and recorded in such publications as Experian Gazette.

Seizure by the sheriff - upon lodging the appropriate

documentation in the...

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