Question

wners and employees of a company can create contractual personal liability for themselves if they sign a contract on behalf of the company, but the wording of the contract does not make it clear that the signer is signing on behalf of a company. This often occurs when an employee signs a guaranty on behalf of the company. As this article on guaranty (Links to an external site.)Links to an external site. notes, it can be very difficult for the guarantor do get out of the personal guarantee. The other contracting party must release the guarantor from the agreement.

The Perfect Petal, a florist company, entered into a credit agreement with Flower Supplier, Inc. Flower Supplier, Inc., required Mandy, the CEO of The Perfect Petal, to sign a personal guaranty with a credit agreement. The credit agreement and personal guaranty were very similar to the one here. A few years later, Mandy called Flower Supplier, Inc. and told someone that she was selling The Perfect Petal to Jim, but never heard back from them.

A few years more passed and Flower Supplier, Inc. contacted Mandy to say that The Perfect Petal had racked up a huge bill and that Mandy, as guarantor of the credit agreement, was liable.

Why is a personal guarantee preferable to a lien in this situation? (Hint, is there a type of lien that Flower Supplier could get on Perfect Petal's property?).

Assuming that Mandy did not properly terminate the guaranty, is holding her liable on a credit agreement relating to a company she sold the appropriate outcome? Why are personal guarantys so difficult to terminate? Would this make you think twice about entering into a personal guaranty?

Answer 1

1 . In such a situation lien is more preferable over personal guarantee . As personal guarantee in the given case can make CEO of perfect petals personally liable to pay the amount secured in case of default done by the company. A company works on the collective efforts of a wide range of stakeholders. And its sucess or failure is also dependent on their collective efforts as a result its better to resort to personal guarantee. Lien only gives right to the secured creditor to recover any defaulted amount from the assets of the company a safe whole and thus safeguard the financial position of CEO. Thus, lien is more preferable than personal guarantee in such a situation

2. If Mandy did not properly terminate the guarantee then he will become personally liable for the credit agreement relating to the company. First the payment will be seek from the assets of the company and still if there is any shortage then even Mandy's personal assets can be dragged into the matter. Hence, if guarantee is not properly terminated by the Mandy then it will hold her liable on the credit agreement relating to company.

3 . Personal guarantee are generally of two types one is limited and the other one is unlimited. It is the unlimited guarantee which is very hard or difficult to terminate. Even cancellation of guarantee do not terminate obligation to pay amount and you are still liable to pay guaranteed debt as persisting on cancellation of guarantee. Since bank want to assure that they get the full amount what they are paying as a result they tends to enter those those personal guarantee and that's why is is difficult to terminate as they will always want them to be assured of getting what they have paid. That's why personal guarantee is so difficult to terminate.

4 . Yes, not only twice we should think hundreds of time and better to take legal advice before entering or getting into a personal guarantee as it's make personal asset of an individual at risk if company makes any default in repayment and since debts taken by company are generally of very large amount . This can turn into worst scenario for the person giving personal guarantee . Thus , before entering into personal guarantee a person should consult his or her legal advisor to get thorough knowledge of pros and cons of giving personal guarantee.