17/12/14 - Does the "shaggy" defence work for guarantees?

Discerning readers of a certain vintage will remember the classic “It Wasn’t Me” by Pop Impresario Shaggy, relive his genius here:

https://www.youtube.com/watch?v=Qv5fqunQ_4I

While tempting, it is with some regret that we must advise that arguing “It Wasn’t Me” in the face of overwhelming evidence to the contrary is rarely a valid argument.

Yet, in fact, we frequently see this – and those making the argument are often running companies. Often, our Debt Recovery team are instructed by lenders to raise proceedings against directors to recover their company’s debts.

“But it’s a limited company”, is the defence. “A director isn’t liable for company debts.”

And, yes, that is usually true – but not when a director has given a personal guarantee. This is a personal agreement by a director (or anyone else) to pay debts. If the company doesn’t have the cash to pay – maybe because it is insolvent – then a guarantee gives an avenue of recovery against the directors personally.

Of course, directors are clever people. They might think twice about signing a stand alone agreement headed “Personal Guarantee” in a big black font. However, personal guarantee can be contained within a application forms, and these are signed by directors.

When things go wrong, we find a surprisingly high number dispute that they are personally liable for their company’s debts simply by signing such a form. Among the arguments we have heard are:

“I didn’t read the Form”

“My secretary completed the Form and I just signed it”

“The Form did not make it clear I would have personal liability”

“I completed the Form wearing my limited liability hat, and not in a personal capacity, therefore I cannot be personally liable.”

All variations on: “It wasn’t me”.

The law in Scotland is quite clear on this issue. An application form can incorporate a personal guarantee. True, the particular clause must give fair notice to person signing that it concerns them personally, and creates a personal obligation, but nevertheless there is a genuine risk of personal liability.

At Gilson Gray, we assist both borrowers and lenders.  We can review the terms of credit application forms to ensure they are valid, and to advise on the consequences of signing. We can also assist with proceedings – especially if someone is caught red handed!

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For More Information Contact:
David Alexander
Mobile: 07841920089
Direct Dial: 0131 516 5362
Email:dalexander@gilsongray.co.uk
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The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.