As a director, how is my personal guarantee treated in insolvency such as in a liquidation?
Can we get out of a personal guarantee if our business is insolvent?
In insolvency we do get asked sometimes what happens with a personal guarantee. Obviously it is a stressful time when a business is in difficulty and people hope for the best but fear the worse. However the thorny problem of personal guarantees (PGs) does loom up. Basically, you simply cannot get out of a personal guarantee. The only way is to either renegotiate the contract so that your lender no longer insists on a PG, or if it is called, then either pay it, come to some sort of agreement to pay it, or in the worst case go bankrupt.
Some insurers offer personal guarantee insurance which may go a little way to covering costs should the worst happen. The cost of this insurance will depend on the level of cover or the risk involved. Insurers will also look at cash flow forecasts, any previous defaults in payment and the type of industry the company is in.
So who asks for personal guarantees?
As a director of a limited company, it is standard practice for lenders (and indeed some suppliers) to request that you sign a Personal Guarantee (PG) to act as security for company borrowing. By doing this, the creditor will have recourse to the director personally in the event the company defaults. PGs are not used for sole traders or partnerships (except LLPs) as any debt of the company is deemed as a personal liability of the business owner(s) and so a PG is not required.
If you have been asked to sign a PG, you should always seek independent legal advice before signing anything as the terms can vary (it is not uncommon for the banks to request a legal charge over your home at the same time). It is also worth noting that most banks will keep a PG on file indefinitely, even once the borrowing has been repaid.
In the event that a PG is called upon, the next step can vary depending on the creditor and the amount being called on. The usual routes are:
1. The creditor will issue a Statutory Demand. This will give you 21 days to either settle the debt or reach an agreement to pay. If this is not possible, the creditor can start bankruptcy proceedings (providing of course that the debt is over £5000 which is usually the case with PGs). Previously it was £750, however new rulings enforced from 1st October 2015 increased the threshold.
2. The creditor can apply for a County Court/High Court Judgement. The usual results will be that they then wither get a Warrant of Execution and get the bailiffs in, or they go for a Charging Order to secure the debt against your home.
If a PG is called upon, the first route is to get legal advice to ensure it is valid. If it has not been drawn up and/or executed correctly, it could well be invalid. The second route is to talk to the creditor (if you haven't already). Legal action can be a lengthy and costly affair and most creditors would entertain a negotiated settlement as long as there is a strong commercial case for them to do so.
The best way to protect yourself would be to seek professional help prior to the default event which causes a PG to be called upon. The earlier the professionals get involved, the more tools they have at their disposal to help you. If you have a PG that is being called upon, do remember there is still help at hand, but the available options are somewhat reduced. Talk to us re the personal guarantee issue or Keith Steven re the company's problems on 08009700539
A word of warning. A personal guarantee is personal and has nothing to do with the company. A lender may be able to take a charge over your property so that they can recover the debt in the event that you cannot pay and they have had to go to court.
Also be aware that paying creditors that have a personal guarantee before creditors that do not have such security can be considered as paying a preference .
So what can we do to help you if you are worried?
Perhaps the most important thing we can do is try and ensure that the guarantee is not called in. I.e. can we find a way to save your business? If the business is not viable and has to go into liquidation then we can help you talk to the bank, or to however has insisted on a guarantee, and try and come to some sort of settlement.
Landlords do often ask for personal guarantees for rent arrears and the liabilities under the lease. It should be remembered that landlords can and do try and call these in. However, if you are building up arrears with the rent then you must take advice as lease obligations can be bound in a CVA and the power of a CVA enables you to vacate a premises if necessary. It may be possible to assign the lease to another operator to ensure that you are not on the hook for the remainder of the rent.
Talk to us for more information. You can call and talk to a director anytime on 07833 240747
Written by Julian Donnelly and Keith Steven
I have bought a company and it's gone wrong
Business and personal objectives in insolvency
I need bankruptcy advice
Business rescue and recovery
Creditors' rights explained
The company has cashflow problems
Company in financial trouble?
Company rescue in Scotland
How do I collect in more debtors?
Director's dos and don'ts
Personal guarantees in insolvency
Top 10 tips for directors
Failed MBO, merger or acquisition? What happens next?
Guide to cost-cutting
Insolvency toolkit for directors
Is my company viable for restructure?
My business is failing - what should I do?
Guide to overdrawn directors' accounts
Can directors be liable for a company's debts?
What is a personal liability notice?
Save my business from going under