Directors Personal Guarantee - What Happens In Insolvency or Liquidation? Archives

Directors Personal Guarantee – What Happens In Insolvency or Liquidation?

1st November, 2023 in Directors Personal Guarantee – What Happens In Insolvency or Liquidation?

What Is A Personal Guarantee? As a company director, lenders, some suppliers, and landlords may request that you sign a Personal Guarantee (PG). This guarantee acts as security for a company's liabilities such as debt repayments or rent. By so doing, the creditor will make you personally liable for the debt owed to them in the event the company becomes insolvent. This means that the protection normally given to directors of limited liability companies is taken away, or in more legalease "pierces the corporate veil of protection"If you have been asked to sign a PG, you should always seek independent legal advice. Terms can vary, and 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. Situations Where A Personal Guarantee May Be RequiredBank Overdrafts Commercial Rents Trade Credit ( Especially in Construction Industry) Unsecured Business Loans Invoice Finance Property Loans Leasing AgreementsCan Directors Get Out Of A Personal Guarantee If The Business Is Insolvent? In insolvency, we do get asked sometimes what happens with a personal guarantee. 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. 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. If it is called in, then;Pay it, come to an agreement to pay it, or in the worst case, go bankrupt.Are Personal Guarantees Enforceable? If the personal guarantee has been done properly and is legally sound then it is enforceable. However, it can sometimes be the case that documents have been lost or the guarantor didn't actually realise what they were signing. The latter situation is hard to prove as directors have to hold up to a higher standard than normal consumers signing contract. It is risky to think that personal guarantees are unenforceble as this is rarely the case. Besides do you have the resources to go to court? How will the creditor claim on the personal guarantee? If a PG is called upon, the next step can vary. This depends on the creditor, and the amount being called on. The usual routes are:The creditor will issue a Statutory Demand.which 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. 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 accept 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 0800 9700539. What about Personal Guarantee Insurance? 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. Often the insurers will cap the liability at 80% of the amount that migh be claimed upon.As of December 2020 HMRC has moved ahead of floating charge holders in order of creditor priority, such as invoice finance, who incidentally often ask for personal guarantees, in getting paid in insolvency situations. This will mean more claims on PGs against directors by their lenders. Therefore if you think your company could be rescued don't delay.A word of warning. A personal guarantee is personal and has nothing to do with the company. A lender may be able to place a charge over your property so that they can recover the debt in the event that you cannot pay.Also, be aware, that paying creditors, who have a personal guarantee from you, before creditors that do not can be considered as paying a preference . This will mean that in a terminal insolvency event such as liquidation or administration the payments could could be reversed. Does having a personal guarantee affect your credit rating? The answer is simply, no. Why? because a personal guarantee is not registered on any public document. It is simply a private contract between the parties. Of course, if your personal guarantee is called in and you get into financial difficulty then it will affect your rating. There have been calls for a register of personal guarantees that exists in some jurisdictions in Continental Europe. 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 company is not viable and has to go into liquidation, then we can help you talk to whoever 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. Lease obligations can be bound in a CVA, and the power of a CVA enables you to vacate 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.

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Directors Personal Guarantee – What Happens In Insolvency or Liquidation?

9th October, 2023 in Directors Personal Guarantee – What Happens In Insolvency or Liquidation?

What Is A Personal Guarantee? As a company director, lenders, some suppliers, and landlords may request that you sign a Personal Guarantee (PG). This guarantee acts as security for a company's liabilities such as debt repayments or rent. By so doing, the creditor will make you personally liable for the debt owed to them in the event the company becomes insolvent. This means that the protection normally given to directors of limited liability companies is taken away, or in more legalease "pierces the corporate veil of protection"If you have been asked to sign a PG, you should always seek independent legal advice. Terms can vary, and 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. Situations Where A Personal Guarantee May Be RequiredBank Overdrafts Commercial Rents Trade Credit ( Especially in Construction Industry) Unsecured Business Loans Invoice Finance Property Loans Leasing AgreementsCan Directors Get Out Of A Personal Guarantee If The Business Is Insolvent? In insolvency, we do get asked sometimes what happens with a personal guarantee. 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. 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. If it is called in, then;Pay it, come to an agreement to pay it, or in the worst case, go bankrupt.Are Personal Guarantees Enforceable? If the personal guarantee has been done properly and is legally sound then it is enforceable. However, it can sometimes be the case that documents have been lost or the guarantor didn't actually realise what they were signing. The latter situation is hard to prove as directors have to hold up to a higher standard than normal consumers signing contract. It is risky to think that personal guarantees are unenforceble as this is rarely the case. Besides do you have the resources to go to court? How will the creditor claim on the personal guarantee? If a PG is called upon, the next step can vary. This depends on the creditor, and the amount being called on. The usual routes are:The creditor will issue a Statutory Demand.which 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. 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 accept 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 0800 9700539. What about Personal Guarantee Insurance? 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. Often the insurers will cap the liability at 80% of the amount that migh be claimed upon.As of December 2020 HMRC has moved ahead of floating charge holders in order of creditor priority, such as invoice finance, who incidentally often ask for personal guarantees, in getting paid in insolvency situations. This will mean more claims on PGs against directors by their lenders. Therefore if you think your company could be rescued don't delay.A word of warning. A personal guarantee is personal and has nothing to do with the company. A lender may be able to place a charge over your property so that they can recover the debt in the event that you cannot pay.Also, be aware, that paying creditors, who have a personal guarantee from you, before creditors that do not can be considered as paying a preference . This will mean that in a terminal insolvency event such as liquidation or administration the payments could could be reversed. Does having a personal guarantee affect your credit rating? The answer is simply, no. Why? because a personal guarantee is not registered on any public document. It is simply a private contract between the parties. Of course, if your personal guarantee is called in and you get into financial difficulty then it will affect your rating. There have been calls for a register of personal guarantees that exists in some jurisdictions in Continental Europe. 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 company is not viable and has to go into liquidation, then we can help you talk to whoever 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. Lease obligations can be bound in a CVA, and the power of a CVA enables you to vacate 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.

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Directors Personal Guarantee – What Happens In Insolvency or Liquidation?

What Directors of Companies with Debts Need to Know in 2023

6th January, 2023 in Directors Duties in Insolvency and their Implications Directors Personal Guarantee – What Happens In Insolvency or Liquidation? What Directors Need To Know About Bounce Back Loans

Here is what we, in the insolvency world, know now after the last 12 months of dealing with thousands of distressed directors.Business growth is impacting working capital. Do you need to sort out cashflow problems? Will the business need new funding soon? Has your bank said no? If so contact us on 0800 9700539 Staff shortages due to a very tight labour market. This harms productivity. What is your plan to cope? Inflation and rising taxes are likely to dampen consumer confidence on some kinds of spending. How do you plan for these changes?Annual accounts, corporation tax returns, confirmation statements must be filed even if your company was seriously impacted by Covid. These take time and cost money with accountants. Failure to file can lead to fines.Many directors are considering voluntary dissolution for their companies or clients companies if they have unmanageable debts. This is a waste of time and possibly advisory fees.If your company has a bounce back loan, the lender will REJECT the strike off and will actively tell Companies House it rejects the dissolution. Otherwise the BBLs cannot be refunded, (by the British Business Bank) to the lender.If the company owes any tax such as VAT, PAYE, NIC or corporation tax, then HMRC will REJECT any strike off and actively tell Companies House it rejects the dissolution.HMRC is a secondary preferential creditor for VAT, PAYE, NIC, and it will require voluntary liquidation or may even begin to issue winding up petitions to seek any recovery through compulsory liquidation. Any taxes owed, by the company, may be lost if the company is dissolved.We are also seeing many enquiries and clients receive letters from private debt collectors, who're acting on HMRC's behalf. These are usually for under £10,000 of tax owed. Has HMRC outsourced the small stuff, to focus on larger debtors?The message is loud and clear - do not waste time, or incur advisory fees, by trying to avoid insolvent liquidation, get advice quickly and ACT quickly. The correct solution is creditors voluntary liquidation. If the company is viable, then consider the rescue options too.If you are a company director or advisor, please read our experts guide to help learn more about this process. It is FREE and anonymous to download.If you want another and compelling reason to avoid proposing voluntary dissolution....when the company has creditors and BBLs The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act has may be used to pursue existing and former directors for debts, with the possibility of prosecution.The Act is designed to prevent:False dissolution of companies to avoid investigation into the directors Using the dissolution of companies to shed liabilities and transfer assets to a new company. The use of the company dissolution process as an alternative to formal insolvency proceedings, such as voluntary liquidation2022 saw a sharp increase in the number of directors being prosecuted for fraud, showing that the Insolvency Service is serious about cracking down on directors, especially in relation to the CBIL and BBL schemes.These new pieces of legislation mean that it is much easier to investigate dissolutions and will open up company directors to a much higher level of scrutiny.So the message is this: do not try to dissolve an insolvent company that has BBLs debts, HMRC and or other creditors.

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What Directors of Companies with Debts Need to Know in 2023

Who are Preferential Creditors?

24th August, 2022 in Directors Personal Guarantee – What Happens In Insolvency or Liquidation? Insolvency process

A preferential (or preferred) creditor refers to a creditor who has the right to payment before others. The priority of secured, preferential, and unsecured creditors is set out in the Insolvency Act 1986. Preferential creditors are prioritised before unsecured creditors in a liquidation but below creditors with a fixed charge on assets such as property.

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Who are Preferential Creditors?

HMRC to become Preferential Creditors

5th January, 2021 in Directors Duties in Insolvency and their Implications Directors Personal Guarantee – What Happens In Insolvency or Liquidation? News

Since 1 December 2020 a change in the law has meant that the way in which some liabilities due to H M Revenue & Customs (“HMRC”) are dealt with in an insolvency situation has changed. Previously, monies due to HMRC are dealt with in exactly the same way as monies due to trade suppliers, landlords, utility companies and so on. However, as of 1 December 2020 this changed and some monies due to HMRC will become “preferential” and will therefore come before other creditors.The reform only applies to taxes which are collected and held by businesses on behalf of other taxpayers, i.e VAT, PAYE, Income Tax. For taxes owed by businesses, the changes are non-applicable i.e for corporation tax and employer’s national insurance contributions.It’s believed that this decision will add £185 million to the treasury’s overall tax intake, over a year.HMRC will continue to offer time to pay arrangements if viable businesses with tax debts need to avoid insolvency. The measure is expected to combat tax avoidance. But doubts arise in that it will transfer the losses to the private sector, have a knock-on effect of borrowing costs and leave employees and suppliers with smaller pots when businesses go bust. However, the Treasury states that most unsecured creditors are unable to recover their debts anyway, so will be unaffected.On the face of it, this might not seem too important, but it could really impact on both your company and any personal guarantees you may have given to say banks or other lenders. What are the implications for directors that have given personal guarantees? The issue is that many banks and other lenders rely on what is called a debenture, which creates fixed and floating charges, to give them security over the assets of a company. In essence, this means that in a formal insolvency, such as liquidation or administration, monies realised from the sale of assets, or the collection of book debts, go to repay any sums due to the bank or other lender. However, where the assets are covered by a floating charge (usually plant, machinery, vehicles, stock, cash balances, book debts which are not subject to a factoring agreement), then any monies realised from those assets MUST first go to pay any preferential creditors.At the moment, the only preferential creditors are certain employee claims which are usually fairly modest, so the bank or lender gets most (c80%) of the money realised after payment of the modest preferential claims and after providing a percentage of the monies to deal with the claims of all other creditors. This is known as the Prescribed Part, it is set down in statute and usually equates to somewhere just over 20% of the monies realised.However, after 1 December 2020, the claims of the preferential creditors might be significantly higher due to monies due to HMRC. This would therefore mean that the monies paid to the bank or other lender might be significantly reduced. If this results in a shortfall to the bank or lender which you as a director have personally guaranteed, this could be a MAJOR concern. It might also result in significant concerns for your bank or other lender!Obviously, not all companies are the same and each companies' individual circumstances may vary. However, this could be quite a problem for some companies and directors.Creditors Priority

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HMRC to become Preferential Creditors

Personal Guarantee on Commercial Leases

15th July, 2020 in Directors Personal Guarantee – What Happens In Insolvency or Liquidation? Property and Real Estate Retail

Do I have to personally guarantee the lease for commercial property? When a limited liability company takes on a property the landlord will often ask for a third party to guarantee the obligations under the lease which, in the most part, is to pay the rent and service charge. This is to reduce the risk to the landlord should the company become insolvent. Most landlords will ask for this guarantee if the company is relatively new, with little trading history, or in a high risk industry. Many restaurants and hospitality businesses are asked for these guarantees. It is usually the directors of the company that are asked to personally guarantee the lease. As a director this means that you are personally liable for the rent if the company can't pay and the landlord can pursue through the courts and could even make you bankrupt. If I can't pay the rent can the landlord make me personally liable under the lease? Simply, If you give a guarantee then yes. Whether it is commercially sensible for the landlord to pursue you is a different matter. If you have no assets or the amount is relatively small that you owe then it might not be worth the costs. A landlord would need to issue a bankruptcy petition and in the end it might be better to concentrate on reletting the property with a tenant that can pay the rent. Obviously the landlord is only likely to call on the personal guarantee once the company has vacated the property.One important thing to realise is that if more than one person has been named as a guarantor then these people are what is called jointly and severally liable. What this means is that one person and/or all are liable. So it might be practicable that the landlord goes after the richest guarantor rather than pursuing each one individually especially if the others guarantors have little money! Can I get out of the personal guarantee I have given to the landlord? If your business has had a strong trading history and paid rent on time over a number of years then at lease renewal it would be a good idea to try and negotiate that the new lease does not need a guarantor. However, this will all be part of the negotiation and any landlord will be reluctant to give this additional security up. It might be that you can negotiate limits to the guarantee, such as it can only be claimed on in the first 2 years of the lease (incidently most business failures happen in the first 2 years) or that the guarantee does not include the family home. How can I avoid the guarantee being called upon? If the company is in a strong financial position then the guarantee isn't a problem. If the company starts showing warning signs of insolvency it is crucial that the directors act. It is all too common that directors are over optimistic or blind to the signs. This can seriously increase personal liability problems.So, the basic advice is GET ADVICE if you are worried your company could be getting into difficulty and you have a personally guaranteed the lease.

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Personal Guarantee on Commercial Leases

Personal Guarantee Insurance (PGI) What is it?

12th July, 2019 in Directors Personal Guarantee – What Happens In Insolvency or Liquidation?

Personal Guarantee Insurance helps out those who have signed a personal guarantee (usually company directors) on a new or existing loan, by providing them with cover. It protects the guarantor in the case of the loan being called in. Typically, the loan is guaranteed by the individuals’ personal assets i.e. a house. Why do I need this? When you need to apply for finance, the bank or finance provider is likely to request you to sign a personal guarantee if the assets of the company cannot cover the loan. Personal Guarantee insurance provides protection for your personal assets, hence if the worst happens, and the company became insolvent, you can be reassured that your own personal and family assets are safe and not at threat. What are they key features?An Annual Insurance Policy, regulated by the FCA The level of risk and individual circumstances determine the price Insurance is available to directors of limited companies or partners of an LLP – you can insure multiple guarantors on a single policy It is available for personal guarantees against secured and unsecured loans Cover is based on a fixed percentage of the guarantee amount – usually a low percentage and never to cover the full amount. The maximum is 80%. Over time, the cover rises as the business become more stable and show they are less risky to the lender.How does Personal Guarantee Insurance work? It is very straightforward and simple – apply via an online form (the level of cover available depends on if the personal guarantee is for a secured or unsecured loan). Once you have applied, insurers assess your circumstances and will provide you with a policy to review.To apply, you must be a member of a UK partnership or a Limited Company Director. How much does it cost? The cost of PGI depends on how large the guarantee is, what assets are being used as security, the timeframes involved and the overall risk of the insurer.Typically, it varies from £750 p.a. to £12,000.The costs of insurance can be categorised as a company expense when the finance the personal guarantee is needed for, is for the company. This means there is less impact on personal finances for taking out the insurance. Are there any exclusions? Exclusions tend to be included in the detailed policy summary you receive. However, some typical exclusions to your insurance are:If the personal guarantee is covered by another insurance If a personal guarantee is called in due to dishonest, fraudulent behaviour When, following a notification, the insurance support advice is ignored If you are aware of a potential insolvency event, before or at the time of taking out the coverSo, should I take out Personal Guarantee Insurance? Being licensed insolvency practitioners, we hear from directors facing financial struggles, daily. When you have a Limited Company structure, you are prevented from your own personal possessions being taken. When you take out PGI, this changes. The corporate veil is lifted, meaning there is no separate legal entity for the director and the company, instead they are seen as one. From this, directors see their company liquidation lead to personal bankruptcy.Taking out personal guarantee insurance prevents this. It protects your personal possessions if ever a situation like this occurs. However, it is not cheap and it might be a drain on yours or the company’s cashflow. At least the choice is there.

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Personal Guarantee Insurance (PGI) What is it?

Directors Personal Guarantee - What Happens In Insolvency or Liquidation?

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