Long Read: the cast iron guarantee
04/07/2025
In this week’s Long Read, Edmund Locock, Senior Associate for Gateley Legal, considers the pitfalls inherent in personal guarantees, opening with the hopefully uncontroversial statement that “personal guarantees are pretty much everywhere in the unregulated asset finance and leasing sector…”
Such is the prevalence of these guarantees that, in December 2023, the Federation of Small Businesses (“FSB”) made a super complaint regarding their use to the Financial Conduct Authority (“FCA”), which the FCA agreed to investigate (despite, one might note, having no remit over the unregulated sector).
This article, you will be relieved to read, is not an eye-watering analysis of the FCA’s current and creeping regulatory parameters. That’s next month. No, in this article we will be discussing two key pitfalls of the ubiquitous personal guarantee, and how to avoid them.
First Pitfall: Past Consideration (Spoiler: it’s not good consideration)
When not executed as a deed, a personal guarantee signed underhand by the guarantor will seek to take effect as a simple contract. The thing about contracts, however, is that they require consideration.
Consideration is not in this case, as the online Cambridge Dictionary posits, “the act of thinking about something carefully” (although you should do this). It is the reciprocal movement of something we call consideration (money, a promise, an act, et cetera) between contracting parties.
You pay me some money (consideration), I build you a ship (reciprocal consideration). Contract.
You pay me some money (consideration), I sell you my ship (reciprocal consideration). Contract.
You pay me some money (consideration), you give me your ship (more consideration). Pirate.
…You get the idea.
For guarantees, the consideration given by the guarantor is its promise to do something. For the lessor, the consideration is almost always agreeing to enter into the hire agreement with the lessee.
One thing you should know, however, is that past consideration is not good consideration. If the lease in question pre-dates the guarantee, therefore, there may be grounds to challenge the guarantee on the basis that a contract has not formed due to lack of consideration from the lessor.
There are two main ways to avoid this pitfall:
- always ensure that personal guarantees pre-date the date of the lease agreement; and/or
- require that personal guarantees be executed as a deed, because properly completed deeds do not require consideration.
Second Pitfall: Enforcement
Not all guarantees are born equal. The specific wording used will determine (i) what kind of liability attaches to the guarantor, and therefore (ii) what enforcement steps you can take.
It is common ground, according to Lord Justice Pattern in Spencer Robert McGuiness -v- Norwich and Peterborough Building Society [2011] EWCA Civ 1286, that guarantees may impose one or more of the following types of liability on a guarantor:
- a “see to it” obligation (i.e. an undertaking by the guarantor that the principal debtor will perform his/its own contract with the creditor);
- a conditional payment obligation (i.e. a promise by the guarantor to pay the instalments of principal and interest which fall due if the principal debtor fails to make those payments);
- an indemnity; and
- a concurrent liability with the debtor for what is due under the contract.
Conditional payment obligations (2) and concurrent liabilities (4) (crucially) create a debt due under the guarantee. Therefore, following termination of a hire (or loan) agreement which (should) also create a contractual debt due and owing by the lessee known as a termination sum, the guarantor will be liable for the debt under the agreement because he/it is also liable in debt under the guarantee.
If a guarantee includes either, or both, of the above a lessor can pursue its guarantor by either Part 7 proceedings (i.e. suing them), or by commencing insolvency proceedings (i.e. a bankruptcy petition) because (2) and (4) create a debt in law owed under the guarantee.
But that is not the case, however, for “see to it” obligations (1) or indemnities (3).
A “see to it” obligation in a guarantee is, in essence, a promise by the guarantor that the principal (i.e. the lessee) will comply with its obligations under the guaranteed agreement(s). If the lessee fails to do so, the guarantor has not promised that it will make payment himself/itself but will be liable for damages resulting from the lessee’s failure. Those damages will require judicial assessment, as does a claim under an indemnity.
Where damages require assessment, they cannot be said to be “liquidated” for the purposes of s267(2)(b) of the Insolvency Act, which sets out the qualifications required for a petitioning creditor to be able to present a bankruptcy petition.
The result of the above is that, although lessors can pursue guarantors who have given “see to it” guarantees or indemnities through Part 7 proceedings, they cannot commence insolvency proceedings against them unless and until the guarantor’s liability has been ascertained by the Court and judgment entered against.
The way to avoid this pitfall, as you might have guessed, is to ensure that guarantees and indemnities include a conditional payment obligation (2) and/or a concurrent liability with the lessee (4) for the sums due under the agreement.
Conclusion
Personal guarantees offer an invaluable means of shoring-up a lessee’s creditworthiness, but in a world where personal guarantees remain prevalent, it is essential for funders that personal guarantees (i) are properly completed, and (ii) impose the appropriate type of liabilities on the guarantor.
If you want a guarantee to create a debt, you need to say so!
by Edmund Locock, Senior Associate for Gateley Legal
-- Note that this is a shortened and edited version of the article which appeared in full in Leasing World issue 208 --
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