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Personally Guaranteeing a Business Loan? Always See a Lawyer First!

Signing personal guarantees in respect of loans made to your thriving business may seem virtually risk free. However, as a High Court case showed, times can sadly change and that is why legal advice is always necessary.

The case concerned a professional firm that had agreed an overdraft facility with a bank. Five individuals had personally guaranteed the loan, up to a limit of £55,000. After the firm fell into liquidation, owing money to the bank, the bank launched proceedings to enforce the guarantees. However, one of the guarantors sought to strike out the bank’s claim on various grounds.

In ruling on the matter, the Court found that, on its true construction, the guarantee required the bank to serve a formal demand on the guarantor before an obligation to pay arose. However, it rejected the guarantor’s claim that the initial such demand was invalid, in that it sought £55,500. The law is clear that a request for more than is in fact due does not of itself invalidate a demand made against a guarantor.

The guarantor also argued that a subsequent demand had not been validly served upon him, in that a letter before action to which it was attached had been mis-addressed. In dismissing the strike out application, however, the Court found that that claim raised factual questions which could only be resolved, together with other issues in the case, at a full hearing on the merits.



 
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