It is becoming increasingly common for lenders to look for ways to ensure payment when advancing funds. One of the most common ways they do this is by asking you—as an individual—to give a personal guarantee.
What is a Personal Guarantee?
A personal guarantee is a legal commitment made by an individual to personally repay a debt or meet the obligations of another. Essentially, it is a legal promise to repay credit issued to another (in the event they are unable to). Personal guarantees are most commonly found in business, whereby a company director or business owner signs a personal guarantee to personally repay their company's debt if the company itself is unable to pay. However, personal guarantees are not limited to business loans and can be sought in a variety of circumstances, such as:
- Property mortgages
- Leases
- Asset lease agreements
- Finance arrangements
In short, by signing a personal guarantee, you are offering your own financial security as a 'backup'. A personal guarantee is a binding contract and should not be signed lightly.
The general rule is that when accepting a personal guarantee from a third party, the lender is entitled to act in its own interest. In Smith v Bank of Scotland 1997 SC (HL) 111, Lord Clyde explained at p 117:
"it is well settle that as a general rule the [guarantor] is expected to look to his own interest and to make such inquiries as he considers necessary or appropriate"
When Can You Challenge a Personal Guarantee?
While personal guarantees are often enforceable, there are several circumstances under which a Personal Guarantee can be challenged. The main grounds are misrepresentation, promise, error and prescription.
The lender cannot misrepresent the position. Even a half-truth could be a misrepresentation: if the lender does make a representation (oral or in writing), it must be full and fair. Separately, if the guarantor makes a statement in the Bank's presence that indicated she did not understand the debtor's position, that must be corrected as seen in the above case of Smith v Bank of Scotland. For example, if you rely on a false representation that induced you to sign a personal guarantee, you can challenge the guarantee on the grounds of misrepresentation.
If the lender used clear words, either in writing or verbally, that it will unequivocally not enforce the personal guarantee for a certain period of time or until something is done, then a legally binding promise may have been created which could be relied upon to defend enforcement proceedings brought by the lender.
If the personal guarantee was signed on terms which, by mistake, do not reflect the agreement between you and the lender, then it can be argued that there is no agreement due to error. However, the current law in Scotland is that for the personal guarantee to be rendered void and unenforceable, there must not only be error but also some other factor, such as the bank acting in bad faith.
Personal guarantees are also subject to the five-year time limit set out in The Prescription and Limitation (Scotland) Act 1973. That means that if a lender has not taken any steps to enforce the personal guarantee within five years of it becoming enforceable, the guarantor's obligation to repay the debt will have prescribed.
Recent Case Insight
McKinlay v Avellierie Limited & Kenneth Scott [2025] SAC (Civ) 6
This case concerned a loan advanced by Company C to Company A. The agreement included a personal guarantee from the Director of Company A. The debt was thereafter assigned to the Director of Company C, and the question before the court was whether that assignation included the right to enforce the personal guarantee. It was held that the personal guarantee did transfer alongside the loan debt.
Why Personal Advice Matters
Every personal guarantee is different. Personal guarantees are intricate contractual agreements on which a guarantor should take independent legal advice prior to signing. It is imperative that a guarantor understands the scope of their exposure under a personal guarantee. If you are being asked to sign a personal guarantee, or a lender is now seeking to enforce one, the most important step you can take is to get specialist advice tailored to your situation.
At Miller Samuel Hill Brown, our litigation experts provide personalised guidance so you can understand your legal obligations and protect your personal interests by taking the time to understand your unique situation, address your concerns, and provide tailored solutions that make a real difference.
Contact our litigation team today for clear, strategic legal guidance.
