Many farms are operated using some form of credit such as farm business loans, overdrafts, hire purchase agreements, leasing or credit unions loans.
Other forms of credit on farms may include merchant debt, contracting debt and monies owing to vets and other service providers.
Farming businesses can be operated as sole traders or company structures.
What is a limited company?
In many cases, farmers may be asked to sign personal letters of guarantee in availing of credit facilities from banks and merchants.
This will occur in particular if the farm business is being operated through a company structure.
A limited company is a completely separate legal entity in its own right.
One of the main benefits for farmers forming a company is limited liability protection, which means the business is entirely separate from the people who own and manage it.
Simply put, if the company is unable to pay its debts, its owners’ personal assets will be secure.
Therefore, this creates a need for personal guarantees from the directors/owners if providing finance or credit to the company.
Sole traders, on the other hand are personally liable for all farm/business debts, losses and liabilities.
What is a personal letter of guarantee (PLG)?
A PLG is a promise or a legal undertaking by an individual to repay another person’s debt (the debtor) if they are unable or unwilling to repay.
If a company seeks credit or funding for their farm business and the director signs a personal guarantee, this is legally binding on the director.
This creates an obligation on the director/farmer to repay the debts of the company in a case of default.
Banks and guarantees
A bank’s personal guarantee can be for a fixed amount or a ‘continuing’ guarantee.
This means that even if the current debt, which you are guaranteeing is repaid, the guarantee will continue to exist unless expressly terminated by agreement with the lender.
Unless cancelled, the guarantee could be relied on for further borrowings of the company.
Joint and several liability
When signing a guarantee with another person, the liability is generally ‘joint and several’.
This means that you are both jointly and separately liable for the full amount of the debt.
Therefore, a lender can pursue you solely, the other person solely or both of you together for the full amount of the debt in cases of default.
For example, if dairy farmer Dan and his wife Mary sign a PLG on behalf of their company D&M Farm Limited for €100,000 in favour of Ulster Bank, the lender can pursue them both together and individually up to the full amount of €100,000.
In reality, this would only happen in exceptional circumstances.
It is essential that a guarantor receives independent legal advice before signing a PLG for a lender.
This ensures that you are fully informed of what you are signing and the implications involved.
When signing a PLG with a bank, the guarantor must also sign the independent legal advice section acknowledging they have received the independent advice or are happy to sign without receiving it.
This confirms that they understand the implications and responsibilities involved.
Merchant credit guarantees
Merchants such as feed suppliers may also require personal guarantees from farmers operating through a limited company structure.
According to Roche’s Feeds in Limerick, they have seen a big increase in dairy farmers forming companies over the past eight to 10 years.
Enforcing these guarantees is a slow, laborious and costly process and can involve getting judgement orders or a garnishee order over the basic payment scheme.
Farmers need to understand the implications when signing these personal guarantees.
Taking legal advice when providing PLGs will enable farmers to fully understand the commitments and implications of signing these documents.
There may be an opportunity to negotiate the terms and limit the personal liability if receiving the correct legal advice in advance.