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 takes away the protection of a limited liability company, or as lawyers say, it “pierces the corporate veil.” It is always crucial to get independent legal advice before signing a PG, as the terms can vary significantly.
A personal guarantee is a private contract between you and a creditor. It is not registered on any public document. The following are some common situations where a personal guarantee may be required:
Most lenders will keep a PG on file indefinitely, even after the original borrowing has been repaid. It is risky to assume a personal guarantee is unenforceable, as this is rarely the case if the document was done properly and is legally sound.
Once a company is in financial difficulty, a creditor may choose to call in a personal guarantee. You simply cannot get out of a personal guarantee once it’s been signed. The creditor’s next step depends on the amount owed and the creditor’s approach. The usual routes for a creditor to claim on a PG are:
Statutory Demand:
The creditor may issue a Statutory Demand, which gives you 21 days to settle the debt or agree to a payment plan. If you cannot do this, the creditor can start bankruptcy proceedings against you.
Court Judgement:
A creditor can apply for a County Court or High Court Judgment. This could lead to a Warrant of Execution, where bailiffs seize assets, or a Charging Order, which secures the debt against your home.
Your first step should be to get legal advice to ensure the PG is valid. Most creditors would prefer to reach a negotiated settlement to avoid the lengthy and costly process of legal action, as long as there is a strong commercial case to do so.
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 to help you. The most important thing we can do is try to save your business to ensure the guarantee is not called in at all. If the company is not viable and must go into liquidation, we can help you negotiate a settlement with the creditor.
You should also be aware of the following:
Paying a Preference:
Paying a creditor who has a PG from you before other creditors can be seen as paying a preference. In a terminal insolvency event like liquidation, these payments could be reversed.
Using a CVA: A Company Voluntary Arrangement (CVA) can be used to exit lease obligations and allow you to vacate premises, which may prevent a landlord from claiming on a PG for rent arrears.
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 you get into financial difficulty, that will affect your credit rating.
What about personal guarantee insurance?
Some insurers offer personal guarantee insurance, which may help to cover costs. The level of cover and cost depends on the risk involved. However, insurers often cap the liability at 80% of the amount that may be claimed.
Ultimately, your best course of action is to get professional help immediately if you are worried. We can help you with the personal guarantee issue and the company’s problems. Talk to us for more information.
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.
