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.
ReadBusiness Asset Disposal Relief
What is Business Asset Disposal Relief? Business Asset Disposal Relief which allows you to pay less capital gains tax, at 10% on gains of all qualifying assets which are sold. It is applied when you sell your business, and usually in a Members Voluntary Liquidation (MVL). Capital Gains Tax is the tax on profit when you are selling something which has increased by value. Am I eligible for the relief? To qualify for Business Asset Disposal Relief , you must meet one or more of the following criteria:You must be disposing all or a part of a business, where you were a sole trader or business partner. Even if you dispose of the assets after, you are still eligible. However, you must own the business for over a year before you sell it and if you are closing the business, the assets must be sold within 3 years. You have at least 5% shares, securities or voting rights within the company being sold. You are also eligible if you have had the chance to buy your shares at least a year before the sale. For this, you must have been an employee of the firm for at least a year, and the company must be one which focuses on trading, instead of those which involve little trading, for example, those who focus purely on investment. You lent an asset to the business and it is being sold. This only applies if your assets were used for a year before the shares were sold, or if you have already sold 5% of your part of the business or shares. You’re selling shares which you got through an Enterprise Management Incentive scheme, after the 5th April 2013.How do I work out the tax I will have to pay?Work out the gains of all the qualifying assets Add all the gains together (deduct any losses) to get the total taxable gain available for Business Asset Disposal Relief Deduct any tax-free allowance You will pay 10% tax on what is left.How do I actually claim for Business Asset Disposal Relief ? To claim for Business Asset Disposal Relief fill in Section A of the Entrepreneurs’ Relief Help sheet here https://www.gov.uk/government/publications/entrepreneurs-relief-hs275-self-assessment-helpsheet , or you can do it via your Self-Assessment tax return. During your lifetime you can claim up to £1 million relief, with no limit on how many times you can claim for it.Following the first Labour Budget it has been it has been confirmed that the relief remains but from April 2025 the rate will go up to 18% from the current 10%
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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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