Are Funding Circle’s Personal Guarantees Enforceable?

Funding Circle, a London-based commercial lender, provides business loans by connecting SMEs with investors. Since its inception, it has facilitated over £10 billion in loans to approximately 90,000 businesses, positioning itself as an alternative to traditional bank lending.

The High Court has confirmed that assignments of these debts to Azzurro Associates (a debt buyer owned by hedge fund Elliott management) may have the effect that personal guarantees may not be payable to Azzurro or to Funding Circle.

If you have taken out a loan with Funding Circle, secured by way of personal guarantee, contact our lawyers to advise you on your options (and particularly whether you can challenge enforceability if debt enforcement proceedings are contemplated or underway).

Funding Circle and Personal Guarantees

In 2020, Funding Circle sold a significant number of small business loans—many secured by personal guarantees—to Azzurro Associates, a debt purchaser owned by Elliott Management.

Azzurro has since acquired approximately 10,000 loans with a total face value of around £500 million and is actively enforcing these guarantees against business owners. This has led to growing scrutiny over the validity of personal guarantees issued through Funding Circle’s lending platform.

Azzurro Associates’ High Court Claim

A High Court case (BL-2024-NCL-000010) is underway which examines whether Azzurro can enforce personal guarantees on loans originally arranged through Funding Circle.

The dispute centres on allegations that defects in Funding Circle’s documentation may invalidate these guarantees. Azzurro is pursuing two directors, Alan Smith and Anthony McNally, to test whether their liability extends to Azzurro despite its loan acquisitions. The case is proceeding to a full trial.

The final ruling could set an important precedent for the enforcement and trading of small business debt in the UK.

“More than arguable case” that Personal Guarantees are Unenforceable

In an interim ruling, Judge Terrence Phillips found that two guarantors had a “real prospect of success” in arguing that their liabilities were unenforceable due to procedural deficiencies.

The Judge also noted a “more than arguable case” that the assignments of rights were not valid legal transfers of debt. Additionally, the definition of “lender” in Funding Circle’s documentation may restrict enforcement to a limited group of creditors, potentially excluding Azzurro.

The ongoing case could have wider implications for personal guarantees transferred via Funding Circle’s platform. While both Azzurro and Funding Circle assert the guarantees remain valid, an adverse ruling could impact the secondary debt market.

What is a Personal Guarantee?

A personal guarantee is a legal commitment by a business owner to personally repay a company’s outstanding debt obligations. It is a security measure frequently required by lenders when providing unsecured business finance.

By executing a personal guarantee, the guarantor assumes personal liability for the company’s debt in the event of default. If the business is unable to meet its repayment obligations, the lender may seek to recover the debt from the individual guarantor.

Advantages of Providing a Personal Guarantee

• Personal guarantees enable businesses, particularly start-ups and those with limited credit histories, to access funding that may otherwise be unavailable.

• Such guarantees provide lenders with additional security, thereby facilitating investment in business growth and expansion.

Disadvantages of Providing a Personal Guarantee

• While initially signing a personal guarantee may not affect the guarantor’s credit rating, failure to meet repayment obligations due to business default can significantly impact their credit score.

• Personal assets, including real property, vehicles, savings, and investments, may be at risk if the business defaults.

• In the event that the business is unable to meet its financial obligations, and the guarantor’s personal assets are insufficient to cover the debt, the guarantor may face personal bankruptcy, with severe long-term financial consequences.

• Personal guarantees are often immediately enforceable upon default, without the lender being required to exhaust alternative enforcement measures against the primary borrower before pursuing the guarantor.

Key Considerations before Executing a Personal Guarantee

Before executing a personal guarantee, it is imperative to obtain independent legal advice and fully comprehend its implications. Consider the following key points:

• Review the Loan Documentation: Scrutinise the guarantee provisions carefully, paying particular attention to the definition of an “event of default”, which triggers enforceability.

• Seek Legal Advice: Many financial institutions mandate that business owners obtain legal advice prior to executing a personal guarantee. Ensure that a qualified solicitor explains the legal and financial ramifications before signing.

• Consider Personal Guarantee Insurance: Such insurance policies may mitigate financial risk by covering a portion of the guaranteed debt should the business default.

• Explore Alternative Funding Options: Evaluate other forms of financing that do not require a personal guarantee, such as secured business loans, invoice financing, asset-based lending, or government grants.

• Negotiate Terms Where Possible: Attempt to negotiate a fixed term for the guarantee, rather than allowing it to remain enforceable for the entire duration of the loan.

How We Can Assist

Our firm has extensive expertise in advising business owners on the enforceability of personal guarantees. Our team of specialist solicitors and barristers possesses substantial experience in both corporate and personal insolvency matters. We provide a comprehensive review and legal analysis of personal guarantees, assessing their enforceability and identifying any potential defects. If enforcement action has been initiated, we can negotiate with creditors on your behalf to secure a favourable settlement and potentially avoid bankruptcy.

Where procedural defects exist in the drafting or execution of a personal guarantee, we may be able to challenge its enforceability. If you are facing personal bankruptcy, we can advise on alternative solutions, including Individual Voluntary Arrangements (IVAs). Should litigation arise, our firm is well-equipped to represent you in court proceedings to contest enforcement claims. Additionally, we assist with debt recovery and dispute resolution, employing mediation and other legal strategies to achieve the best possible outcome for our clients.

We are highly experienced litigators and are regularly instructed in complex, high-value disputes. Unlike other law firms, we focus exclusively on litigation and are adept at navigating cases against large financial institutions. We pride ourselves on our strategic, results-driven approach to legal disputes.

Seek Expert Legal Advice

The recent litigation concerning Funding Circle personal guarantees underscores the importance of fully understanding the legal consequences before executing such agreements. If you have signed a personal guarantee and are now facing enforcement action, it is essential to obtain expert legal advice at the earliest opportunity. Contact our firm today for a consultation to discuss your specific circumstances and explore your legal options.

Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice. You should always seek advice from a qualified solicitor regarding your specific legal situation.