Personal guarantees in banking: Navigating the cross-border enforcement maze

When structured carefully, they provide an added layer of protection, ensuring that in the event of a default, individuals behind the corporate borrower can be held personally liable. But while obtaining a guarantee may be straightforward, enforcing it — particularly across borders — is anything but.

The nature and purpose of personal guarantees

Personal guarantees are contractual commitments by a third party (typically a company director or shareholder) to repay a borrower’s debts if the borrower defaults. For banks, they mitigate the risks associated with lending to companies with limited credit histories or financial instability. The enforceability of such guarantees depends on clarity of terms, the guarantor’s capacity, and jurisdiction-specific laws governing contract formation and suretyship.

In England and Wales, section 4 of the Statute of Frauds 1677 requires that a personal guarantee must be in writing and signed by the guarantor (or someone authorised by them) to be enforceable. This seemingly simple requirement has tripped up many lenders, particularly when relying on informal communications or electronic signatures without proper verification.

Challenges in cross-border enforcement

Cross-border enforcement of personal guarantees introduces layers of complexity:

1. Jurisdiction and governing law
   A key issue is determining which court has jurisdiction and what law governs the guarantee. Sophisticated guarantees typically include choice of law and jurisdiction clauses, but the effectiveness of these clauses varies depending on the countries involved.
2. Recognition of foreign judgments
   A judgment in one country does not automatically translate into enforceability in another. Recognition and enforcement depend on reciprocal treaties (such as the Hague Judgments Convention), local procedural rules, and public policy considerations.
3. Service of process and due process
   Legal actions against guarantors abroad often stumble over procedural hurdles like proper service of legal documents and ensuring the guarantor has had adequate opportunity to respond.
4. Asset tracing and collection
   Even with a favourable judgment, collecting assets can be difficult if they are hidden, held in trust, or located in jurisdictions with opaque banking regulations.

Traps for the unwary

Despite their apparent simplicity, personal guarantees are fraught with drafting and procedural pitfalls. Some of the most common include:

1. Improper execution
   Failure to properly sign a guarantee in accordance with local legal formalities — such as witnessing, notarisation, or signing in a specific capacity — can render it unenforceable.
2. Ambiguous or incomplete terms
   Guarantees that lack specificity in scope, duration, or the liabilities covered may be deemed void or limited in effect.
3. Unilateral amendments to underlying contracts
   Modifying the primary loan or facility agreement without the guarantor’s consent may discharge their obligations altogether under many legal systems.
4. Lack of independent legal advice
   In certain jurisdictions, if the guarantor claims undue influence or did not receive independent legal advice, courts may refuse to enforce the guarantee.
5. Expiry Clauses and Revocation
   Some guarantees lapse automatically after a set period or require formal notice of extension. Others are revocable unless explicitly made irrevocable.
6. Reliance on standard forms
   Using boilerplate guarantees without tailoring them to the borrower’s jurisdiction, the nature of the lending relationship, or local enforcement nuances can be a costly mistake.
7. Issuing a statutory demand where security has been given
   If a personal guarantor has provided security — such as a legal charge over property or other collateral — a statutory demand may be inappropriate or even invalid. Under Rule 10.5(5)(c) of the Insolvency (England and Wales) Rules 2016, a statutory demand can be set aside if the creditor holds security for the debt and fails to disclose it or account for its value. Courts have emphasised that a creditor must either realise the security first or explain why it is insufficient before pursuing bankruptcy proceedings. Ignoring this can result in the statutory demand being struck out, as seen in Martin v McLaren Construction Ltd.

Recent UK case: Sibner Capital Ltd v Jarvis & Hughes [2022]

In this case, the High Court refused to enforce a personal guarantee after the lender accepted a reduced repayment from the borrower without the guarantors’ consent. The court held that this materially altered the guarantors’ obligations, thereby discharging them. The case underscores the importance of not varying the underlying agreement without explicit guarantor approval — especially in light of the Statute of Frauds, which demands strict adherence to formalities for enforceability.

Best practices for lenders

To enhance the enforceability of cross-border guarantees, banks should:

1. Draft with precision: Guarantees should be tailored to the transaction, with clear provisions on governing law, jurisdiction, waiver of defences, and language translations where needed.
2. Conduct diligence on the guarantor: Assess the guarantor’s solvency, domicile, and asset locations early in the lending process.
3. Consider local opinions: In higher-risk jurisdictions, local legal counsel should opine on enforceability to avoid unpleasant surprises later.
4. Use arbitration clauses when appropriate: International arbitration can sometimes offer a more neutral and enforceable route than litigation.
5. Monitor changes in law: Treaties and local statutes affecting enforcement can change. Regular review ensures continued validity.

Conclusion

While personal guarantees offer lenders important recourse, enforcing them across borders is fraught with legal, procedural, and practical challenges. Lenders must be proactive — designing airtight guarantees, seeking local legal guidance, and remaining vigilant throughout the lending lifecycle. The Statute of Frauds 1677 remains a cornerstone of enforceability in the UK, and recent case law shows that even minor deviations from formal requirements or contractual terms can unravel a lender’s security.

Please do not hesitate to contact Donna Goldsworthy and Jayne Backett to discuss further.