Just a quick note to say a big thank you to all the staff at KSA, our CVA was passed today by creditors voting in an overwhelming number including HMRC to accept the proposal as prepared by KSA.
The road to reach today’s conclusion has been bumpy, but at each stage your team has supported and guided us through the issues and we have reached a very satisfactory outcome to the benefit of customers, staff, all creditors and shareholders.
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 Required
- Bank Overdrafts
- Commercial Rents
- Trade Credit ( Especially in Construction Industry)
- Unsecured Business Loans
- Invoice Finance
- Property Loans
- Leasing Agreements
Can 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.
Author of this page is Keith Steven who is the Managing Director of KSA Group Insolvency Practitioners