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Guaranteeing Your Litigation Strategy

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MST is finding that more and more of our clients are turning to litigation in order to enforce contracts and recover debts in these tough economic times. In any litigation strategy regarding the enforcement of a debt through a letter of demand and ultimately the Courts, it is very useful to have access to further and better security with which to recover a debt against a debtor.

One such method of obtaining further and better security against a debtor is by way of obtaining a personal guarantee given by directors, shareholders or other backers of a debtor or future debtor.

What is a “personal guarantee”?

A personal guarantee is a promise to you from an individual to make payments, under a contract or loan, when a debtor individual or company, is unable to do so. The guarantor executes a promise in favour of the supplier/creditor to pay you in the event that the primary debtor fails to do so.

Personal guarantees also provide creditors with the opportunity to recover debts owed by companies that have gone into administration or liquidation, although the laws relating to voluntary administrations sometimes operate to delay a creditor’s right to sue on a guarantee.

A personal guarantee will only be of utility however where the guarantor has sufficient means or assets to pay the debt. Hence, it is important to ensure that a personal guarantee comes from an individual with sufficient means and assets.

Litigation strategy

In the event that you have a debt owed to you by a debtor who has not paid and you have a personal guarantee executed in your favour, you should consider calling up that personal guarantee as a means of placing pressure on the debtor and the guarantor to pay the debt.

Usually, the first step in the recovery process is to issue a demand to the guarantor under the guarantee. This is an important first step as most guarantees provide that they cannot be relied upon before a Court until such time as the guarantor is formally called upon to service the debt.

Should the guarantor then fail to attend to payment, you are free to issue proceedings against the guarantor and/or the original debtor. In most cases you are better off issuing against both the guarantor and debtor to give you greater access to assets capable of satisfying any judgment debt.

Guarantees, in conjunction with well drafted Terms and Conditions of Trade, can also be relied upon in a litigation strategy to reclaim interest, levy fees and legal costs at a rate better than that normally available through the Courts.

It is therefore important that guarantee avenues are examined when considering whether you wish to recover a debt. This option represents a “second bite of the cherry” and one that should be taken advantage of, as and where appropriate.

Author: Mark Skermer