What is a Director’s Personal Guarantee?
As a company director, some lenders, suppliers and landlords may ask you to sign a Personal Guarantee (PG).
This guarantee acts as security for a company’s liabilities such as rent or debt repayments. By doing this, the creditor makes you personally liable for the debt owed to them if the company becomes insolvent. Effectively, this means that the protection usually given to directors of limited liability companies is removed, or in more legal terms “pierces the corporate veil of protection”.
If requested to sign a PG, it is recommended that you seek independent legal advice. Terms can often vary and it is common for the banks to simultaneously request a legal charge over your home. It is also worth remembering that most banks will keep a PG on file forever, even after the loan is repaid.
What scenarios would require a Personal Guarantee?
- Bank Overdrafts
- Commercial Rents
- Invoice Finance
- Property Loans
- Trade Credit
- Unsecured Business Loans
- Leasing Agreements
Can company directors get out of a Personal Guarantee if the business is insolvent?
This is a common question and is stressful when a business is in difficulty.
The simple answer is no. You 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 the PG is called in, then either:
- Pay it immediately;
- Agree to a payment plan with the lender; and
- or in the worst-case scenario, declare yourself bankrupt.
Are Personal Guarantees enforceable?
If the personal guarantee has been executed correctly and is legally robust then it will be enforceable. But it can sometimes transpire that documents have been lost or the guarantor didn’t actually realise what they were signing. In the latter scenario, this will be difficult to prove as directors will be judged against a higher standard than an ordinary consumer signing contracts. Be warned that it can be risky to assume that personal guarantees are unenforceable as this is rarely the case. You also need to consider if you have the resources to go to court in order to prove this.
How can the creditor claim on the Personal Guarantee?
If a PG is called upon then the next steps can differ. It depends on the creditor and the amount of money being called on. The normal routes are:
- The creditor will issue a Statutory Demand. This gives 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 that the debt is over £5000 which is normally the case with PG’s). Previously it was £750. But new rulings brought in from 1 October 2015 raised the threshold.
- The creditor can apply for a County Court/High Court Judgement. This may result in them obtaining a Warrant of Execution and bailiffs being instructed to seize personal possessions or the creditor can apply for a Charging Order to secure the debt against your home.
If a PG is called upon, the first step should be to get legal advice to ensure validity. If it has not been drawn up and/or executed correctly, it could easily be invalid. The second route is to talk to the creditor. Legal action can be a lengthy and costly process and most creditors would accept a negotiated settlement, provided that there is a strong commercial case for them to agree to it.
Often the recommended way to protect yourself would be to seek professional insolvency help before to the default event, which causes a PG to be called upon. The earlier the professional insolvency practitioner gets involved, the more options they have to help you. If you have a PG that is being called upon, remember there is still help available, but the longer you wait, the less options are available.
What is Personal Guarantee insurance?
Some insurers offer personal guarantee insurance, which may help to cover costs if the worst happens. Insurance cost depends on the level of cover or the risk involved. Insurers will also examine cash flow forecasts, any previous defaults in payment and your industry. It is common for insurers to cap the liability at 80% of the amount that might be claimed upon.
As of December 2020, HMRC moved ahead of floating charge holders in order of creditor priority, such as invoice finance, who incidentally regularly ask for personal guarantees, in getting paid in insolvency situations. This should lead to more PG claims by lenders against directors. So if you think your company could be rescued don’t delay, get help today.
Be warned that 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 if you cannot pay.
Plus, 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 the payments may be reversed by the Liquidator.
Does having a Personal Guarantee affect your credit rating?
The simple answer is no. This is because a personal guarantee is not registered on any public document. It is basically a private contract between the parties. If your personal guarantee is called in and you get into financial trouble then it will affect your rating. There have been calls for a register of personal guarantees that exists in some jurisdictions in Continental Europe.
Worried? What can Umbrella.UK Insolvency do to help you?
Perhaps the most crucial 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 attempt to some sort of settlement agreement.
Landlords often ask for personal guarantees for rent arrears and the liabilities under the lease. Remember that landlords can and do try and call these in. But if you are building up arrears with the rent then you need to take advice quickly. Lease obligations can be bound in a CVA, and the power of a CVA enables you to vacate premises if necessary. It may be an option to assign the lease to another operator to ensure that you are not liable for the rest of the rent.
Umbrella Insolvency guided me as sole Director of my small limited company, and the shareholders, through every step of a Members Voluntary Liquidation in a very efficient manner. The steps required were clearly laid out and proactively managed by their licensed practitioner. From first meeting through to an interim distribution of funds to shareholders took only a few days in our case. Thereafter, Umbrella will be managing all of the downstream actions required to complete the process with HMRC and Companies House, through to the final discharge of the company.
Following a personal recommendation, we appointed Umbrella.UK Insolvency to handle the voluntary liquidation of our business (MVL). Tom and his team were excellent, keeping us well informed throughout and working effectively with the company's accountants to ensure all documentation was produced and filed on time. I have since recommended Umbrella.UK to friends looking for similar services and I have no hesitation in recommending them more widely.
I extend my appreciation of your professional efficiency in handling my company business and herewith say thank you.
I'd just like to thank both you and Tom for your help with the closure of my company. You have been highly efficient and very professional throughout. Thank you.
Before I came to Umbrella.UK Insolvency I was in a bad place mentally due to debt because I believed I would be in my current situation for a long time to come. Umbrella Insolvency walked me through my options and helped me pick the best one. I am genuinely amazed at what they managed to do for me and can now afford to live comfortably, and without the constant worry of debt looming over me.
First of all, I would like to say a BIG Thank You for all of your assistance over the past year. I would not be in the positive state of recovery without Umbrella Insolvency. Your care and assistance at the application stage last summer, along with the advice throughout the year, has been great. I would not hesitate to tell anyone in my negative situation where to turn to.
Thank you so much for your help with my IVA. As an ex-company Director my life took a downward spiral when creditors from my liquidated company called upon my personal guarantees. I had been treading water for months, ran up credit card debts and borrowed from family. When a creditor instigated bankruptcy proceedings against me I thought I was going to lose my house. I contacted Umbrella.UK Insolvency who stopped all the phone calls and threatening letters. Umbrella Insolvency explained things in a way I could understand. They negotiated with creditors and my IVA went through, now I can sleep at night again and I kept my home. Thomas Fox was extremely knowledgeable and I truly thank him and his team.
*We don’t charge for an initial consultation, but it may lead to an insolvency solution where our pre-appointment costs are reimbursed as part of the fee structure that creditors approve.