Written ByRobert Moore
Marketing Manager
Rob has over a decade of experience in web and general marketing. He has extensive knowledge of the Insolvency sector and has helped many worried directors with their questions.
Rob is now working with the Board at KSA Group Ltd to develop strategic marketing programmes to support the business plan and drive more company rescues.
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.
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;
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?
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:
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.
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.
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.
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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Worried Director What Will Happen To Me After Liquidation?
"A man in the pub said I cannot be a director of any other company if I liquidate my company. Is this true?" Actually, this statement is entirely false! Misconceptions like this frequently arise from individuals with limited understanding of the subject matter. Such misinformation can cause undue anxiety for directors considering liquidation, fearing it might personally affect them. Guess what? Listening to bar room experts, inexperienced accountants, or no insolvency specialist lawyers can stop decisions being made, this failure to make a decision is really what could land you in trouble. So how will liquidation affect me and how long does it take? Having a limited liability company means that the directors have little risk (or limited liability) if the company fails, as long as they have acted properly and acted in time. What is more, if as a director, you have been compliant and on the payroll for many years, you can actually claim redundancy from the government like any other employee. But, and it is a big but, if you fail to act in time, fail to act reasonably, fail to keep books and records, continue taking credit KNOWING that the company cannot possibly repay it, then you ARE at risk of personal financial loss or worse such as losing your house. So, act now and get help for your company and more importantly start reducing your own risks. Voluntary liquidation is the quickest most efficient way to deal with an insolvent company that has no future. As a director of an insolvent company, you are at risk if you do not act. This risk RISES the longer you don't act to put the company into liquidation. If you fail to act and the company is wound up by the creditors (compulsory liquidation) then the Official Receiver (OR) will be appointed to liquidate the business and he or she will investigate the activity of the directors and the business over the last 2-3 years. This is known as a conduct report on each director. If the OR can prove there was wrongful trading where, for instance, you have taken credit from a supplier or took deposits from customers when you knew that it was highly unlikely that you could pay them back, then you could be made personally liable. This is known as the "lifting of the veil of incorporation" that protects directors under limited liability. If this happens then you could made liable for PAYE, VAT and creditors monies from the time that you should have known the company had no reasonable prospect of surviving the problems it faced. Additionally, the directors may face disqualification proceedings under the Company Directors Disqualification Act 1986 for up to 15 years, they can be fined and may face the loss of personal assets like your home, or even personal bankruptcy. Look, if you as directors have acted naively you may not know that you have broken these laws, but now you do know, it is vital to ensure that you protect yourself as a director by acting quickly to cease trading and put the company into voluntary liquidation; or consider a company voluntary arrangement if the company is VIABLE if the problems are solved. What is Creditors Voluntary Liquidation and what does it mean for me? In short, liquidation usually means, the company's trading stops and it's assets are turned into cash or "liquidated". All other possible liabilities, like employment liabilities, landlord's rent or payments to lease companies are stopped. It really is the end of the company, but the "business" may survive if a phoenix is organised. Liquidation is a powerful way to END creditor pressure and let you get on with your life. What if I have signed personal guarantees? If you have signed personal guarantees or indemnities to lenders, then the liquidation could lead to them being called in if the bank cannot get its money back from the company. There is little that can be done about that, but you should not delay decisions on liquidation to try and prevent a PG being called in: just think what ALL of the company's debts landing on your shoulders would do. Also it should be noted that HMRC now rank ahead of floating charge holders in any liquidation since December 2020. Consequently, this may well mean that lenders that you have personally guaranteed will get less recovery hence exposing you more. All banks will agree a deal to repay the PG over time - provided you work with the bank to reduce their exposure. One great piece of FREE advice - always make sure that ALL tax returns, VAT returns and annual returns have been completed and sent in and that other "compliance" issues are dealt with wherever possible. These are important processes and will help protect you as individual directors. It shows that you have been acting properly. I have heard about directors being able to claim redundancy in liquidation If you have been employed by the company and made payments via PAYE then you will be able to claim redundancy from the government and this is in fact a very simple process (20 minutes to fill out a form and we can help with that) so there is no need really to employ a third party to make a claim. This process has been open to fraud so the HMRC are cracking down on operators that claim to be able to get money back when there is not enough "paperwork". It isn't worth the risk. If it sounds too good to be true then it probably is! You need to learn more about the options. This is clearly a general guide so, if you have any worries at all, please, just call us and we will talk you through the situation free and with expert guidance for your situation. Call one of our advisors or if you prefer, call our IPs (insolvency practitioners) now: Just one CALL will help relieve the stress and get you out of the mess. Why not call 08009700539 or 020 7887 2667 now? We could help you start the liquidation process today. (8.15am till 5.00pm; Out of hours call on 07833 240747, Wayne Harrison (IP) or Eric Walls (IP) on 07787 278527) Finally, please remember this: NO BUSINESS is worth losing your health, relationships, marriages or your children over. Act properly, take advice, get the problem sorted and then get on with your life. In a little while the stress will go and you can focus on other things that are more important. Want more information on liquidation? Get our new free 2023 Experts Complete Guide to Creditors Voluntary Liquidation that covers Bounce Back Loans We are experts in liquidation, voluntary liquidation, administration, pre-pack administration, business rescue, corporate rescue and company rescue, we can help solve your problems but only if you talk to us. Call 0800 9700539 for help.or email us your worries at help@ksagroup.co.uk
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