What happens to Personal Guarantees when a business becomes insolvent?

What happens to Personal Guarantees when a business becomes insolvent?
Local builders using Personal Guarantee Insurance to insure against business failure hits new high.
Most sectors of the economy are struggling right now. In a past article, for example, we have commented on the rise in closures of pubs and restaurants. In this article, we look at the local builders’ sector, quoting data from Purbeck Personal Guarantee Insurance, which shows that businesses in that sector are struggling to get loans without Personal Guarantees (PG). As a result, Personal Guarantee Insurance (PGI), to cover the guarantors personally should insolvency strike has hit a new high. We conclude by looking at how Insolvency Practitioners can help those businesses without PGI if they become insolvent.
Applications from local builders for PGI were up 135% in 2022
The number of local builders applying for personal guarantee insurance (PGI), to protect their personal assets if their business becomes insolvent, hit a new high in 2022. The specialist PGI provider, Purbeck Personal Guarantee Insurance, recorded a rise in applications from local building firms of 135% in 2022 versus 2021, representing a new high, as directors/owners took on new finance just to help with the day-to-day costs of running their businesses.
The average personal guarantee backed loan rose to over £174,000 in Quarter 4 2022, up from £156,900 a year earlier. The danger with personal guarantees is that they put the personal assets of the loanee at risk. Lenders will ask for a personal guarantee when there are not enough assets in the business to repay the loan if the business fails. Given the current economic difficulties, it is not surprising, therefore that we are seeing such a big increase in PGI.
Todd Davison, MD of Purbeck Personal Guarantee Insurance, pointed out that their findings uncovered the personal risks that many small builders have taken on in the last 12 months so that they can keep their businesses from becoming insolvent. He went on to say:
“Many builders in need of new finance not only find that there is a poor choice of loan products, but when they are able to find the right loan, they have to take on a big chunk of risk themselves as security for the lender. This means if the firm fails, the lender could use the builder’s personal estate such as their home and savings to settle the debt. A rapidly growing number are therefore taking steps to protect their personal assets should their business become insolvent.
Small builders are feeling the impact of inflation and economic uncertainty on all sides and we know a growing number of construction companies are in ‘critical financial distress’. It therefore makes perfect sense that they are doing what they can to bring some certainty in very uncertain times.”
Our Advice
In recent months, like Purbeck, we have seen an increase in Directors of local building companies asking us about the merits/risks of taking out a Personal Guarantee or what their exposure is to claims under Personal Guarantees, and how they should respond to such claims. Elaine Wilkins, at our Bournemouth office comments,

“…. in the month of February 2023 alone we had 4 enquiries from local builders, which is well up on the average.”
Inevitably the rise in building material costs is a big issue in this sector, with quotes quickly becoming out of date, and we would certainly recommend the use of a credit check on suppliers to minimise the chances of supply issues in the event of supplier insolvency.
These enquiries, however, are across the board, and not just from builders. If no Personal Guarantee Insurance is in place, and the company is unable to pay its debts and 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.
The risks associated with personally guaranteeing company loans can result in serious consequences for the Guarantor, including significant equity decreases in the family home (which might even need to be sold) or, in the most severe cases, bankruptcy.
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. We 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 personally 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.
Perhaps 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 some sort of negotiated settlement.
Talk to us if facing insolvency and Personal Guarantees are involved
If your company is struggling to pay its debts and is facing insolvency, the sooner you talk to us the better, especially if a Personal Guarantee is involved. If the Personal Guarantee has been properly legally drafted, then the only options are: to take action to put things right before the Guarantee is called in; come to an agreement to pay it, or in the worst case go bankrupt. As always, the sooner action is taken the more options there are available and the better the chance of a good outcome.
Please contact us or call any of our offices, below, for a FREE initial discussion on the ‘phone or over a coffee.

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