Personal Guarantees, Insolvency and Personal Liability
In recent months we have seen an increase in Directors asking what their exposure is to claims under Personal Guarantees, and how they should respond to such claims.
As the British Business Bank has pointed out recently, alternative lenders and private debt funds have filled the gap left in the UK small business finance market after the mainstream banks scaled back their lending post Pandemic. However, data from Purbeck Personal Guarantee Insurance shows that this has come at the cost of an increase in the requirement for Personal Guarantees, even for loans of below £10,000. Should the worst happen, and the loan cannot be repaid and insolvency strikes, our experience is that these Personal Guarantees are being aggressively pursued, significantly affecting the personal finances of directors at liquidation.
What is a Personal Guarantee? How do They Work?
A Personal Guarantee is a legally binding agreement between a business owner to a lender to help the owner access finance. The Guarantor (often a company Director) agrees to be personally liable for the loan of if it cannot be repaid or the company becomes insolvent. Such loans include commercial business loans, invoice finance, bank overdrafts and commercial rent payments.
If the company is unable to pay the debt and thus fulfil its obligations to the lender, the lender can then sidestep any formal insolvency process the company may enter (as well as limited liability protection) and look to recover the debt from the Guarantor personally, by calling in the Personal Guarantee.
Why do Directors agree to Personal Guarantees?
Signing a Personal Guarantee can help business owners access the finance that they need and might otherwise not get. This is especially the case with new business start-ups/newer businesses with limited credit history or business owners with a poor credit score, who often cannot get the loans they need without giving a Personal Guarantee.
As Antony Batty, a Licensed Insolvency Practitioner says:
“Ultimately a business may well secure a loan, possibly from an alternative lender but with a Personal Guarantee attached, which gives the lender the security they want. However, there are significant risks attached to a Personal Guarantee.”
What are the Risks Associated with Personal Guarantees?
The risks associated with personally guaranteeing company loans can result in serious consequences for the Guarantor if the loan cannot be repaid and insolvency is the outcome. These include personal assets such as your home, car, savings, and investments that can be used to settle the business’s debts which could cause significant financial problems, or, in the most severe cases, bankruptcy.
How can Insolvency Practitioners Help?
Whenever a company is in considerable financial difficulty, and is struggling to pay its debts, the directors should seek help from a Licensed Insolvency Practitioner, such as Antony Batty and Company, who will provide detailed and expert advice as to the best course of action.
If all, or some of the company’s debts are secured by a personal guarantee, the director(s) are liable to repay the debt and it is likely that creditors will try and call on the guarantee. That’s where we come in – we will work towards a solution that all parties can accept.
If the Personal Guarantee has been properly legally drafted, the most important thing Insolvency Practitioners can do is try and ensure that the guarantee is not called in and that means seeing if we can we find a way to save the business. Two options could be either a Company Voluntary Arrangement or a Company Administration.
If, however, the company is not viable and cannot be saved the option may be to go into Liquidation. We can then help directors talk to the creditor who has insisted on calling in the guarantee and try and come to a negotiated settlement. Whatever the situation, we will talk directors through all of the options and recommend the best solution for their circumstances.
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