A guarantee is an undertaking by one person (the guarantor) to perform an obligation of another person (a borrower or other debtor), given in favour of the person to whom that obligation is owed (the beneficiary). A guarantee is what is known as a “secondary” obligation – this means that the guarantor is only liable if the borrower or debtor has failed to perform the “primary” obligation, which is the obligation of the borrower or debtor which has been guaranteed. In the context of a loan agreement, a guarantee is an undertaking from the guarantor to the lender that the borrower will perform the borrower’s obligations under the loan agreement, the most relevant obligation being to repay the loan and interest. If the borrower does not pay, the guarantor will perform the obligation itself and make the payment instead of the borrower.

Why are guarantees also given as indemnities?

Guarantees are almost always drafted both as a guarantee and as an indemnity. Unlike a guarantee, an indemnity is a “primary” obligation – it is an undertaking from one person (the guarantor) to pay the beneficiary if the beneficiary suffers loss as a consequence of a specified event. In the case of an indemnity which is part of a guarantee for a loan, the specified event is the non-payment of the loan or other breach of the loan agreement. As a primary obligation of the guarantor, the indemnity is independent of the obligations of the debtor or borrower. An indemnity should, unlike a guarantee, remain in effect should the underlying loan agreement or equivalent transaction be set aside or if the borrower is somehow discharged from its obligations under the loan agreement.

What are the formalities of a guarantee?

A guarantee must be in writing and signed by the guarantor (or the guarantor’s agent). It is usual also for a guarantee to be executed as a deed, to avoid an argument that it lacks contractual consideration.

Does an individual require independent legal advice before giving a personal guarantee?

To avoid the possibility of a guarantee given by an individual being potentially set aside by reason of the guarantee having been given under duress or having been procured by undue influence, a lender may require the individual guarantor to seek independent legal advice before entering into the guarantee. This is particularly the case if the individual guarantor is the husband or wife of a shareholder of the corporate borrower.

Guarantee: individual guarantor

Name: Guarantee: individual guarantor - PaperRock Documents
SKU: FIN008.001
Price: 35.00 GBP
Availability: InStock

This Guarantee is for an individual to guarantee the obligations under a loan agreement of another company. It is suitable where the borrower is a company incorporated in England and Wales.

When do I use this document?

Guarantee from an individual (as opposed to a company) for a corporate borrower’s obligations under a loan agreement. The guarantee is in the form of a standalone Deed of Guarantee between the guarantor and the lender

Use this document:

for a guarantee to be given by an individual for a company’s obligations under a loan agreement
for a guarantee in the form of a standalone Deed of Guarantee
where the borrower is a company incorporated in England and Wales

What key features are included?

13 clauses over 6 pages
standalone deed of guarantee
guarantee undertakings given by way of both guarantee and indemnity
standard creditor protections for the continuing effect of the guarantee
limit of liability of guarantor for up to a specified amount
warning notice to guarantor to take independent legal advice

What else do I need to know?

A lender will typically require that an individual guarantor takes independent legal advice before entering into the guarantee. This is done to avoid the possibility of a guarantee being potentially set aside by reason of the guarantee having been given under duress or having been procured by undue influence. This is particularly the case if the individual guarantor is the husband or wife of a shareholder or director of the corporate borrower.

The lender will also require that the independent legal advisor confirms in writing to the lender that the guarantor has received independent legal advice on the guarantee, that the guarantor understood that advice and is willing to enter into the guarantee. For a form of independent legal advice letter, see

Individual guarantor: independent legal advice letter.

What other documents are available?

For a form of guarantee to be given by a company (as opposed to an individual), see

Guarantee: corporate guarantor

For a guarantee clause to be included in a loan or other agreement, see

Guarantee: contract clause

Description

When do I use this document?

to sub-divide issued shares into a larger number of shares
to consolidated issued shares into a smaller number of shares
typically, on closing of an investment transaction or in connection with an issue of new shares
if the resolution is to be approved at a general meeting, in conjunction with our template general meeting notice Shareholder meeting notice

What are the key features?

ordinary resolution to be passed as a written resolution
alternative forms of the resolution depending on whether the issued shares are being sub-divided or consolidated

What else do I need to know?

A private limited company can alter its share capital in various ways, including:

sub-division: sub-dividing issued shares into shares of a smaller nominal amount
consolidation: consolidating issued shares into shares of a larger nominal amount

Other types of share capital alteration include the allotment of new shares, reduction of capital, redemption or purchase of own shares and converting issued shares into shares of a different class.

Why would a company sub-divide shares?

Companies are often incorporated with a small number of ordinary shares. If the company plans to issue new shares, such as during an investment round, it may need to sub-divide the existing shares so that the numbers and percentages align with the investment terms.

For example, a company incorporated with 2 shares of £1.00 each will need to sub-divide them if it receives investment for 20% of the enlarged share capital.

To achieve the correct percentage shareholdings, one way of doing this would be to sub-divide the existing 2 shares of £1.00 each into 4 shares of £.0.50 each. The investor could then subscribe for 1 share of £0.50 and would own 1 out of the 5 shares in total, equal to 20% of the enlarged share capital.

Another idea would be to sub-divide the existing shares into a much smaller nominal share value as this will facilitate future shares issues and share transfers.

How does a company sub-divide its shares?

Sub-dividing shares requires an ordinary resolution of shareholders unless the Articles of Association exclude or restrict this. If such exclusions or restrictions exist, the Articles must be amended by special resolution to disapply the exclusion or restriction. After passing the ordinary resolution, the company will need to file Companies House Form SH02 within one month.

Why would a company consolidate shares?

Share consolidation is the reverse of sub-division, where a specified number of existing shares are consolidated into a single share or fewer shares.

Private limited companies are less likely to carry out a consolidation than a public company, which may do this to increase its traded share price or perhaps to reduce the number of shareholders on its register.

If a private company wished to consolidate its share capital, this requires an ordinary resolution of shareholders, unless the Articles of Association exclude or restrict this right. After passing the ordinary resolution, the company will need to file Companies House Form SH02 within one month.

Explanatory Guides

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Updated by a lawyer on 04/09/2024

Updated By a lawyer on 01/05/2023

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