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//Guarantors are Now Taking it Personally

Guarantors are Now Taking it Personally

By Aoife Walsh, Solicitor, Commercial Litigation and Dispute Resolution Unit

A personal guarantee is a legal undertaking by an individual (“the guarantor”) to repay another person’s loan (the principal borrower’s).
 
During the Celtic Tiger entering into personal guarantees became common place, particularly for property developers who sought large sums of money from the various lending institutions to fund property development and speculation. Guarantors now often find themselves the subject of legal actions taken by lenders seeking to enforce personal guarantees where the principal borrower is unable to meet repayments.
 
In seeking to recover sums under a personal guarantee, the lender must:-
  •  Secure a judgment on foot of the terms of the personal guarantee; and then
  •  Enforce that judgment against the assets of the guarantor. 
Judgment on Foot of a Personal Guarantee
 
Once the principal borrower has defaulted on the payment of the loan or is no longer in a position to discharge the loan, the lender will usually issue a demand letter to the guarantor on foot of the specific terms of the personal guarantee. The demand letter will seek repayment of the outstanding sums due to it and, if provided under the guarantee, interest on such sum.
 
In circumstances where that sum is not paid by the guarantor the lender may institute legal proceedings against the guarantor:-
  •  In the District Court for sums up to €6,350.00
  •  In the Circuit Court for sums up to €38,092.14
  •  In the High Court for sums in excess of €38,092.14.
In the High Court, where the lender seeks to recover a debt or liquidated demand in money, proceedings may be heard under the summary procedure by the court with or without oral evidence. The lender may then issue and serve a Notice of Motion seeking liberty to enter final judgment against the guarantor. The guarantor may file a replying affidavit to dispute, in whole or in part, the claim made. Where a replying affidavit disputing the debt is filed by the guarantor, the Master of the High Court will decide whether a prima facie defence to the plaintiff’s claim is disclosed in such replying affidavit.
 
If the Master is satisfied that there is a prima facie defence to the proceedings then the matter will ultimately, through different routes, be adjourned to plenary hearing with directions as to the delivery of pleadings. Alternatively in certain circumstances a judge of the High Court may grant judgment.
 
If the Master does not consider that the guarantor has demonstrated a prima facie defence to the claim, then he may grant the lender liberty to enter final judgment. Such a decision of the Master may be appealed by the guarantor to the High Court.
 
Once the matter has been adjourned to plenary hearing it will take the route of traditional litigation which may take up to two years to obtain a hearing date. The Commercial Court deals with cases far more quickly and accordingly for claims of €1,000,000 or more lenders can apply to have the matter dealt with by the Commercial Court. An application for summary judgment can also be submitted.
 
Recently there has been a significant increase in cases taken by lenders concerning personal guarantees being admitted to the Commercial Court. This is primarily due to a surge in the number of loans being defaulted upon. In the case of Ringsend Property Limited v Donatex Limited and Bernard McNamara
[2009] I.E.H.C. 568 the Commercial Court gave judgment against a personal guarantor for the sum of approximately €62.5m. This case concerned the purchase by a consortium of the Irish Glass Bottle site in Ringsend, Dublin, for a sum of in excess of €410m. The consortium included the Dublin Docklands Development Authority, Mr. Bernard McNamara and a Mr. Derek Quinlan. Judgment was made in favour of the plaintiff company in the sum of approximately €62.5m against the property developer, Bernard McNamara. This was on foot of a personal guarantee signed by Mr. McNamara in respect of monies advanced by the plaintiff company to the first defendant, Donatex Limited.
Other cases have turned upon the terms of the personal guarantee and disputes over the liability of the guarantor for certain loans.
 
Enforcement of Judgments
 
Lenders must decide which methods of enforcement are likely to be the most successful once they have obtained judgment and payment has still not been made. One of the key considerations for lenders in deciding how to pursue repayment is the type and value of the guarantor’s net assets. The value of those assets may have significantly reduced over the past number of years and accordingly assets must be carefully considered and their value estimated. The methods by which judgments may be enforced include the following:-
  •  Judgment Mortgage
If the guarantor has property or land it may be possible to secure judgments by attaching judgment mortgages to property. Once a judgment mortgage has been registered lenders may apply for an order declaring the mortgage well charged. An order for sale may then be obtained and thereafter enforced through the Examiner’s Office.
  • Bankruptcy 
Lenders may issue bankruptcy proceedings to have guarantors declared bankrupt. Further information on bankruptcy was given in the Autumn/Winter 2009 edition of HOMS News.
  •  Power of the Sheriff 
Applications may be made to the Sheriff to seiže all of the guarantor’s moveable goods, subject to certain limitations. The Sheriff may sell the goods seižed by auction, tender or private proposal at any time after the expiration of forty-eight hours after seižure.
  • Garnishee Proceedings 
This involves the seižure or attachment of debts due to the guarantor. The court has the power to order a third party to pay lenders directly the debt which the third party owes to the guarantor. If payment is not then made the judgment may be enforced in the same manner as any other order for payment of money.
  •  Instalment Order
This is a procedure whereby lenders apply to have the means of guarantors examined by the District Court and an order made for periodic payments in a lenders’ favour. Non-compliance with an instalment order can lead to committal of a guarantor to prison.
 
To Conclude
 
The furnishing of a personal guarantee by an individual to secure credit to a principal borrower can have far reaching and very serious personal consequences where the principal borrower defaults on its obligations to repay the loan. No individual should enter into a personal guarantee without first having taken legal advice. Such legal advice should be independent from that given to the principal borrower. A guarantor should always ensure that the guarantee accurately identifies which of the principal borrower’s debt is being guaranteed.
 
Where legal action is taken or threatened on the foot of a personal guarantee advice should be taken immediately to ascertain the terms and the scope of the guarantee. It is also advisable to seek advice on any subsequent negotiations and legal proceedings for judgment and enforcement, as business and personal assets may be at risk, as well as the risk of enforcement by way of bankruptcy.
 
For further information contact our Commercial Litigation and Dispute Resolution Unit.
 
Summary
 
Personal guarantees are increasingly being pursued by lenders when the principal borrower defaults on loan repayments.
 
There are a variety of ways in which judgments made on foot of personal guarantees can be enforced.
2018-11-13T10:49:10+00:00November 1st, 2010|Publications|
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