Yates yet another victim of personal guarantees
THE dreaded personal guarantee has struck again, claiming another high-profile victim from Ireland's business community.
Such guarantees, whereby a borrower allows a bank to pursue them personally for the full value of the loan, have now brought down a host of Irish business people, including developers Bernard McNamara and Paddy Kelly and businessmen Niall McFadden and Brendan Murtagh.
The world of Irish business is rapidly splitting into those with personal guarantees (PGs) and those without. For example, Cork developer Michael O'Flynn doesn't have any personal guarantees, whereas other developers in NAMA, like Johnny Ronan, have.
Some developers' wives even have personal guarantees, including Gerry Gannon's wife, who featured in a recent RTE 'Prime Time' programme.
The guarantees operate differently to normal commercial loans, whereby a company takes a loan secured on assets owned by that company. If the loan falls into arrears, the bank goes after the company and its assets, but not after the people running the business.
However, in the case of a PG, an individual agrees to be personally responsible for the full amount of the loan, plus all the interest. Once they sign such a guarantee, they are exposed if the loan goes into arrears.
The bank is then entitled to obtain a judgment in court against that person and can ultimately seize their goods.
One of the reasons PGs are so commonplace in Ireland, as opposed to other countries, is Anglo. It boasted that it demanded "additional" security (including PGs) and this forced other banks to do likewise. AIB, the bank now pursuing Ivan Yates, was one of the lenders that responded to Anglo's tactics.
Irish Nationwide is believed to have the lowest level of personal guarantees.
In many cases, PGs were demanded from existing borrowers, as opposed to new borrowers. If an existing borrower wanted to draw down additional money, the price was providing a personal guarantee.
Of course, many borrowers were far wealthier when they gave the guarantee than they are now -- and that is where the difficulty arises.