The Basics of a Personal Guarantee
As a company director, it’s common for lenders, suppliers, or landlords to ask you to sign a Personal Guarantee (PG).
A PG acts as security, making you personally liable for the debt if the company cannot pay i.e becomes insolvent. A PG does not make you liable for every company debt. Instead, it creates a separate personal contract between you and the creditor. A PG is not registered on any public document. Most lenders will keep a PG on file indefinitely, even after the original borrowing has been repaid. It is highly risky to assume a PG is unenforceable.
It is vital to get independent legal advice before signing a PG, as the terms can vary significantly and have important personal implications.
Where Personal Guarantees Are Usually Used
- Business Loans and Overdrafts
- Lease Agreements for Rent and Service Charges
- Trade Credit (especially in construction and large supply agreements)
- Leasing Agreements (equipment, vehicles, etc.)
Unlimited And Capped Guarantees
- Unlimited vs. Capped: An Unlimited PG makes you liable for the entire company debt. A Capped PG limits your liability to a fixed, specified amount.
What If More Than One Director Signed the Guarantee?
If you are one of a few directors who have signed a PG, the liability may be “joint and several”. This means the creditor may be able to pursue one director for the full amount, as opposed to pursuing each one separately
So, if four directors guaranteed a company debt, it does not automatically mean each director is only liable for 25% of the debt. The creditor may pursue the director it thinks is most likely to pay, or can pay!
Is My Personal Guarantee Valid and Can It Be Challenged?
If a lender, landlord or supplier has demanded payment under a personal guarantee, one of the first things to establish is whether the guarantee actually covers the debt being claimed.
Directors are often worried that a demand under a personal guarantee means they must immediately pay whatever figure is requested. That is not always the case. A personal guarantee is a serious legal commitment and many are enforceable, but the document, the facility it relates to, the signing process and the amount being claimed should all be checked before you accept liability or agree a payment plan.
Also, resigning as a director, closing the company, selling the business, or putting the company into liquidation usually does not cancel a personal guarantee. The guarantee is a separate contract between you and the creditor. If the company cannot pay the debt, the creditor can ask you personally to pay.
Questions to Ask Before Accepting Liability
If you have concerns about what a personal guarantee covers, how it was signed, or the amount the creditor is claiming, review it carefully. Here are some helpful questions to ask:
Does the guarantee clearly cover this debt?
Check whether it applies to the specific loan, overdraft, lease, invoice finance agreement or supplier account now being claimed.
Is the guarantee capped or unlimited?
Some guarantees are limited to a fixed amount, while others may include interest, costs and other charges.
Was the document signed and witnessed correctly?
Execution errors do not always defeat a claim, but they should be reviewed if there is any doubt about whether the contract was actually entered in to.
Has the loan or credit changed since the guarantee was signed?
If the borrowing was refinanced, extended, replaced or materially altered, advice may be needed on whether the original guarantee still applies to the debt now being claimed.
Has the creditor calculated the balance correctly?
Any recoveries from company assets, security, other guarantors or payments already made should be credited against the amount claimed.Were you given the right information before signing? If important information was withheld, or the position was misrepresented, the circumstances should be reviewed.
Was there pressure, undue influence or a lack of independent advice?
This can be particularly important where a spouse or partner signed a guarantee or gave security over the family home.
Was a condition attached to the guarantee?
Some guarantees depend on certain steps being completed before they become effective. If a condition was not met, this may affect the creditor’s position.
Has too much time passed?
If the creditor has delayed enforcement for years, limitation may need to be considered before any payment or written admission is made.
These points do not automatically make a personal guarantee unenforceable. They are reasons to pause, take advice and review the documents before agreeing to pay. In some cases, they may provide grounds to challenge the guarantee. In others, they may improve your position when negotiating a settlement.
What Documents Should You Ask For?
If a creditor has demanded payment under a personal guarantee, you should ask for the documents needed to check the position properly. These may include:
- a copy of the signed personal guarantee;
- the original facility letter, loan agreement, lease or supply agreement;
- any variations, renewals, refinancing documents or changes to the facility;
- a full breakdown of the amount being claimed;
- details of interest, default interest, costs and charges;
- confirmation of any sums recovered from company assets or other security;
- details of any payments made by other guarantors;
- copies of any formal demand letters already issued.
This is not about delaying matters unnecessarily. It is about making sure the guarantee is valid, the correct amount is being claimed, and the creditor has properly credited any sums already recovered.
Is a Personal Guarantee Still Enforceable After Liquidation?
Yes, it can be. Liquidation usually ends the company’s ability to trade, but it does not automatically release a director from a personal guarantee. If the company cannot repay the debt covered by the guarantee, the creditor may pursue the guarantor personally for the shortfall.
The exact position depends on;
- Wording of the guarantee
- Whether the debt is covered by the PG
- If the creditor has followed the correct process
- Are there are any valid grounds to challenge the guarantee or the amount being claimed.
Can an Enforceable Personal Guarantee Still Be Negotiated?
Yes. Even where a personal guarantee appears to be enforceable, creditors may still be willing to negotiate. Court action, bankruptcy proceedings and enforcement against personal assets can be costly and time-consuming. A creditor may prefer a realistic lump sum settlement or structured payment plan, especially where full recovery is unlikely.
Negotiation may be possible where the director cannot afford to pay the full amount, where there are questions about the guarantee or the amount claimed, or where the creditor wants to avoid a long recovery process. Any offer should be based on a realistic assessment of your personal financial position and should be made carefully, ideally with professional advice.
What Should You Do If You Think the Guarantee Is Not Enforceable?
If you believe there may be a problem with the guarantee, you must act quickly. Do not ignore a demand letter, statutory demand or court claim. The sooner the documents are reviewed, the more time there may be to challenge the claim, negotiate with the creditor, or consider whether the company itself can still be rescued or restructured.
You should also avoid making payments or written admissions of liability until you have taken advice, particularly if there may be a dispute about the guarantee, the amount claimed or the age of the debt.
The key is to understand whether a PG is enforceable, what amount is properly due, and whether there is scope to challenge, negotiate or settle the claim before enforcement action escalates.
What Happens When a Personal Guarantee is Called In?
Once a company is in financial difficulty and the creditor is not being paid, they may choose to formally call in the personal guarantee. Once signed and legally sound, you cannot simply exit a personal guarantee.
The creditor’s next step depends on the amount owed and the desired speed of recovery.
The Creditor’s Usual Routes:
- Statutory Demand:
The creditor may issue a Statutory Demand, which is a formal, legal ultimatum. You have 21 days to settle the debt or reach a formal, written agreement for a payment plan. If you fail to do so, the creditor can immediately petition the court to start bankruptcy proceedings against you personally.
- County Court or High Court Judgement (Asset Seizure):
A creditor can apply for a formal Court Judgment against you. If successful, this judgment allows them to enforce the debt through several avenues, including:
- Warrant of Execution: Authorizing bailiffs to seize and sell your personal assets.
- Charging Order: Securing the debt against your personal property, most commonly your home, which allows them to force a sale to recover the debt.
If you receive any formal claim on your PG your first step should be to get legal advice immediately to assess the PG’s validity and negotiate the best possible settlement.
Can a Personal Guarantee Put My House at Risk?
Potentially, yes. If a creditor successfully enforces a personal guarantee and obtains a court judgment, they may apply for a charging order against your interest in a property. A charging order secures the debt against the property in a similar way to a mortgage.
However, a charging order does not automatically mean your home will be sold. If the creditor wants to force a sale, it usually has to make a further application to the court. The court will consider the circumstances before deciding whether an order for sale should be made. It is often not in the best interests to force a sale as the value achieved may be less than in a normal sale AND if the household has any dependents the judge will take this into account.
The Liquidator’s Impact: Payments and Preferences
When a company enters a formal insolvency process like Liquidation or Administration, the Insolvency Practitioner (IP) has specific powers that directly impact any personal guarantee you have signed.
The Critical Risk of Paying a Preference
Major Warning: If you pay a creditor who holds your Personal Guarantee just before the company becomes formally insolvent (e.g., in the weeks leading up to liquidation), that payment may be viewed by the IP as a “Preference.”
- What is a Preference? It is a payment made to put one creditor (the one holding your PG) in a better position than other unsecured creditors.
- The Consequence: The liquidator has the power to apply to the court to have that payment reversed and the funds returned to the company. You will have used the company’s money, and you will still be personally liable under the PG, as the debt will have been revived.
How to Protect Yourself and Your Business
The best way to protect yourself is to seek professional help before a default event occurs and a personal guarantee is called in. The earlier you get professional help, the more tools are available.
- Try and save the Business: The best action is to try and save your business to ensure the guarantee is not called in at all.
- Negotiation: If the company is not viable, an Insolvency Practitioner can help you negotiate a realistic settlement with the creditor. Creditors often prefer a commercial settlement (even a reduced one) over the long, costly process of personal bankruptcy.
- Using a CVA (Company Voluntary Arrangement): A CVA can be a powerful tool, often used to legally exit expensive commercial lease obligations and vacate premises. This action can immediately prevent a landlord from claiming on a PG for future rent arrears.
Common Questions Answered
Does a personal guarantee affect your credit rating?
A personal guarantee itself does not affect your credit rating because it is a private contract and not a public document. However, if the guarantee is called in and the resulting financial difficulty (e.g., a formal CCJ or bankruptcy) occurs, that will severely affect your personal credit rating.
What about personal guarantee insurance?
Some specialist insurers offer personal guarantee insurance, which may help to cover a portion of the liability. However, be aware that insurers often cap the liability—typically at around 80% of the amount that may be claimed—and the policy terms will often have strict conditions regarding insolvency and payment defaults.
Ultimately, your best course of action is to get professional help immediately if you are worried. We can help you navigate the personal guarantee issue alongside the company’s underlying financial problems. Talk to us for more information.
