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 RMT KSA to develop strategic marketing programmes to support the business plan and drive more company rescues.
A personal guarantee is a guarantee by an individual, to cover, backup or indemnify something done by a corporate entity. For example a director guaranteeing to pay back a debt of the company if the company isn’t able to.
Personally guaranteeing debts can be risky, but it can provide benefits. It shows investors/lenders that you are more confident and willing to pay back the debt and use it for a fair, legitimate reason. This brings trust and can even be the final line between getting a loan or not; i.e. if a financially struggling organisation requests a debt from a lender without a personal guarantee, the lender may be more reluctant to lend, especially to the full amounts required, due to threat of them not getting their money back. This compares to if a personal guarantee was used, where the chances of getting back the money are improved if the person has assets.
Unfortunately, no. However, there are steps you can take;
Personal Guarantee Insurance (PGI) exists to protect the guarantors’ assets, when they are at risk from a liquidating company.
When the lender seeks personal assets to be used to repay the loan balance, after the company liquidates, having PGI covers some of the liability. The value depends on the insurance coverage taken out, but usually is worth up to 70% of the insurers’ net liability. Generally speaking these insurances are expensive. Why? Because if you are asking for insurance you are already hinting that perhaps the guarantee is not that solid!
When using the personal guarantee, set limits with the investor, so you can restrict your consequences. Ensure you read all small print before signing!
Ask for a short time period for the guarantee, rather than signing ‘forever and unconditionally’. Why not ask for the guarantee to only apply to a certain amount of time of the payback period?
Request for only a percentage of the funds to be paid in this way. If a company owes £30,000, and you personally guarantee the full amount, you will have to pay back the full extent of this on their behalf (if they are unable to pay back themselves). Only personally guaranteeing 40%, for example, would mean in the case of the company being unable to pay back the debt, you would only have to pay back £12,000 of this.
Carefully select the items which can be seized – do not risk everything. Negotiating such contracts may be difficult, but you never know unless you try.
At Company Rescue, we can help you to negotiate terms and deal with any other personal guarantee issues. Call us today on 0800 970 0539 for advice.
This is quite common where the personal guarantee has been called in. It may be possible to pay off the debt over a longer period of time using an IVA. An IVA can spread the cost over 3-5 years and even write some of the debt off. Usually the lender will want to see at least 40p in the £1 paid back. An IVA is overseen by an insolvency practitioner who collects the money on the creditors behalf. The downside of this is that it will be hard to obtain any credit as your personal credit score will be very poor. You will also need to raise money from any equity in your house in the last year or so of the IVA as a standard contribution to the IVA.
WORST CASE SCENARIO and only after trying/assessing all other options!
When you go bankrupt, your liability for all debts is discharged. Note: this is only for personal bankruptcy, Companies that become insolvent via liquidation or administration do not eliminate personal guarantees.
One final thing. Remember that if you are trading in a business as a soletrader rather than limited you are personally responsible for all the debts of the business. The business debts are your debts. Bankruptcy will be the only way to discharge any of these. Get limited!
Will I Go Bankrupt If I Am A Director Of A Company That Goes Bust?
This is often the biggest worry of directors of companies which are in financial trouble. Generally speaking the whole point of a limited company is that it allows the people running it, i.e directors, to have a LIMITED liability if things go wrong.They are not completely immune, as the Companies Act 1985 and the Insolvency Act 1986 confer certain responsibilties on directors to act reasonably and fairly. So, for instance, if you lie, deceive, and willfully/recklessly pile on debt to a company that subsequently goes into liquidation then you could be held liable personally. This is know as "lifting the veil of incorporation" What is the process? If the company goes into liquidation or administration then the liquidator, who can be appointed by the court or the company's creditors, has to investigate the actions of the directors. This is so that creditors can understand why the company failed and if there is any culpability.If there has been bad behaviour, such as fraud, then the court can hold the director/s liable for the company's debts. This may well result in bankrupcty. In addition, the directors have to show that they have acted in the best interest of the creditors once the company becomes insolvent. As such, any actions that may prejudice their position can be reversed. The two most common such actions arePaying a preferenceA preference is when the director/s pay one creditor over another because they desire them to be better off. This might be a family member or indeed someone that has a personal guarantee for a loan.A transaction at an undervalueA transaction at an undervalue is when assets of the company are moved to another legal entity such as an associated company, or to the directors personally, at a knock down price so depriving the insolvent company of their actual worth.Both of these actions can be reversed up to 2 years after the company entered insolvency. When might a director become bankrupt? Veil of Incorporation If the liquidator takes action by lifting the veil of incorporation due to fraud and negligence as mentioned above and holds the director personally responsible for the debts of the company. Overdrawn Directors Loan Accounts This is a far more common occurence. In effect, this means that the director/s owe money to the company. They may have borrowed or they have extracted money in the form of dividends when there were no distributable reserves (effectively the same thing).This tends to happen when directors want to maintain their incomes, despite the company being in difficulty, because they believe, rightly or wrongly, that the company will move back into profit. The problem occurs if the directors owe the company money and it has gone bust!The liquidators will then pursue the directors for the money as they are a debtor. This can put severe financial pressure on directors as they may have also lost their ability to earn money from the work they did as the director!Normally liquidators will try and do a deal with director to repay the debt or they may opt for an Individual Voluntary Arrangement to pay back the debt. However, if the liquidators believe there maybe assets belonging to the director then they may issue a bankruptcy petition. Personal Guarantees on Loans It is not uncommon for lenders to small businesses to seek the added security of personal guarantees from the company's directors. If the company goes bust then the lenders will seek recourse from the directors. This can lead to bankruptcy and the resultant loss of your home and other assets. As mentioned above the directors may have lost their main way of earning a living from the company anyhow.
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Guide To Liquidation Fees
The costs of liquidation start at around £4000 + VAT. This would be for liquidating a company with a single creditor, such as having an unpaid Bounce Back Loan (BBL) or HMRC. For more than one creditor issue, we would expect the fee to be approximately £4,400 - £6,000 plus VAT.
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How Long Does It Take To Liquidate A Company?
Liquidating a company can take anything from 14 days to 2 years. It depends on the size and complexity of the business and the particular type of liquidation process the company is undergoing. A creditors voluntary liquidation takes a shorter time, generally.
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Trading Whilst Insolvent – Worried Directors Guide
Trading whilst insolvent is a legal term used to describe a business which continues trading when it cannot pay its debts and its liabilities are greater than its assets. It can lead to a breach of several provisions of the Insolvency Act 1986 which can result in the directors being held personally liable
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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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