What personal guarantee means
A personal guarantee is you standing behind somebody else's obligation with your own money.
Three parties are involved. The creditor, who is owed. The principal debtor, usually a company, who owes. And the guarantor, who promises the creditor that if the debtor does not pay, they will.
It is a secondary obligation. The guarantor's liability normally arises on the debtor's default rather than immediately, though many bank forms are drafted so the creditor can proceed against the guarantor without exhausting remedies against the debtor first.
Guarantees must be evidenced in writing and signed by the guarantor. A verbal promise to stand behind a friend's loan is generally not enforceable, which is one of the few protections in this area.
An indemnity is the harder version. It creates a primary obligation, independent of the debtor's liability, and it survives things that would discharge a guarantee. Bank documents frequently combine the two.
How it is used
In Nigeria the standard case is a bank lending to a small or growing company.
The company has limited assets, a short trading history and no security worth taking. So the bank asks the directors to guarantee the facility personally, and the loan proceeds on that basis. Landlords do the same with corporate tenants, and suppliers do it when extending trade credit.
The terms that matter are few and they are worth negotiating.
The amount. An unlimited guarantee covers everything the company ever owes that creditor. A capped one covers a stated sum. Ask for a cap.
The scope. An all monies guarantee covers present and future indebtedness, including facilities you have not heard of yet. A guarantee limited to a named facility is much safer.
Duration and release. Say how and when the guarantee ends, particularly if you may leave the company.
Joint and several liability. Where several directors guarantee, each is usually liable for the whole amount, and the creditor can pursue whoever has assets.
Notice. Ask to be told when the company misses a payment rather than discovering it when demand is made on you.
Key features
- A promise to pay another party's debt if they default
- Must be evidenced in writing and signed to be enforceable
- Can be limited to an amount and a named facility, or unlimited and all monies
- Guarantors are usually jointly and severally liable where there are several
- A guarantor who pays can seek indemnity from the debtor and takes over the creditor's security
- Often combined with an indemnity, which is a harder and primary obligation
How this works in Nigeria
The practical consequence is that limited liability is routinely signed away.
Founders incorporate a company precisely so business debts stay with the business. Then the bank asks for a directors' guarantee, and for that debt the protection is gone. This is not a defect in the structure, it is a commercial reality, but founders should understand what they are doing when they sign.
The second Nigerian reality is that guarantees are given casually within families and between friends, often on a form signed at a bank branch without being read. Guarantors then discover the exposure years later.
A guarantor also has rights, and they are worth knowing. A guarantor who pays can claim indemnity from the principal debtor, and takes over the creditor's rights and security against them by subrogation. And a material variation of the principal contract made without the guarantor's consent, such as increasing the facility or extending time in a way that prejudices them, can discharge the guarantee. That is a real defence and it is often overlooked.
For tenancies, a personal guarantee from a director or a third party is increasingly requested on commercial lettings, and the same negotiating points apply.
Guarantee vs indemnity vs collateral
Three ways a creditor improves its position, and they are not equivalent.
A guarantee is secondary. It depends on the principal debt existing, and the guarantor can raise defences that the debtor could raise. A material variation without consent can discharge it.
An indemnity is primary and independent. The indemnifier owes in their own right, so defences available to the debtor generally do not help, and variations do not discharge it in the same way. It is harder on the person signing, which is why creditors prefer it.
Collateral is an asset rather than a promise. The creditor takes security over property and can realise it on default, and recovery is limited to what the asset is worth.
Bank forms in Nigeria are commonly drafted as guarantee and indemnity together, which gives the creditor the benefit of both. That single word doubles what you are signing, and it is easy to miss.
Limits and risks
For the guarantor, the limitation is that there is very little limit. An uncapped all monies guarantee can grow long after the facility you had in mind was repaid.
Resignation from the company does not release you. A director who leaves remains liable under a guarantee until it is expressly released in writing, and creditors rarely volunteer that.
For the creditor, the value depends on the guarantor's actual means. A guarantee from somebody with no assets adds paperwork and nothing else.
And guarantees can be discharged. Material variation without consent, release of the principal debtor, or the creditor giving up security it held, can all reduce or extinguish the guarantor's liability, which is why creditors draft to exclude those consequences.
Worth knowing
Ask for a written release the day you resign as a director or the day the facility is repaid, and keep it. Nigerian guarantors are pursued years later on facilities they thought ended with their involvement, and the guarantee stays alive until somebody discharges it in writing.
Questions people ask
What is a personal guarantee?
A written promise to pay another party's debt if they default. It is what banks commonly ask company directors for, and it puts the guarantor's personal assets behind a company obligation.
Does a personal guarantee defeat limited liability?
For that debt, yes. Limited liability protects shareholders from the company's debts generally, but a guarantor has agreed personally, so the protection does not apply to the guaranteed obligation.
Must a guarantee be in writing?
Yes. A guarantee must be evidenced in writing and signed by the guarantor to be enforceable, which is one of the few built in protections in this area.
Am I released from a guarantee when I resign as a director?
Not automatically. The guarantee continues until it is expressly released in writing. Ask for a written release on resignation and on repayment, and keep it.
Can a guarantor be discharged?
Sometimes. A material variation of the principal contract made without the guarantor's consent, release of the principal debtor, or the creditor giving up security it held can discharge or reduce the liability. Bank forms are drafted to exclude these effects.
What is the difference between a guarantee and an indemnity?
A guarantee is secondary and depends on the principal debt, so defences and variations can affect it. An indemnity is a primary independent obligation and is much harder on the person signing. Bank documents often combine both.