A Director's Guide to Personal Guarantees

• The content on this page has been written by Robert Moore and approved by Chris Ferguson Licensed Insolvency Practitioner and Managing Director of RMT KSA

As a company director, it’s common for lenders, suppliers, or landlords to ask you to sign a Personal Guarantee (PG). This legal document acts as security, making you personally liable for a company’s debt if it becomes insolvent. In simple terms, it strips away the protection of a limited liability company—lawyers call this “piercing the corporate veil.”

It is always crucial to get independent legal advice before signing a PG, as the terms can vary significantly and have immediate, personal implications.

The Basics of a Personal Guarantee

A personal guarantee is a private contract between you and a creditor; it 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.

Common Situations:

• Bank Overdrafts and Unsecured Business Loans
• Commercial Rents and Property Leases
• Trade Credit (especially in construction and large supply agreements)
• Invoice Finance and Property Loans
• Leasing Agreements (equipment, vehicles, etc.)

Key Types of Personal 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.
• Joint and Several Liability: If multiple directors sign the PG, the creditor can pursue all of you simultaneously, or target just one director for the full amount.

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:

1. 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.
2. 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.

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.