A personal guarantee may be required of directors by any entity or person who is lending money to a company. The loan itself, and responsibility for the monthly repayments of the loan remains with the company. If the company defaults on the loan and either fails to meet the monthly repayments or fails to pay the loan when called in, the lender can pursue not only the company, but can also the directors personally up to the value of the personal guarantee that a director has given. In this article, Insolvency Solicitor Eleanor Stephens looks at the options available to directors that have provided a personal guarantee for a company that is insolvent.
If you’re reading this because you’ve given a personal guarantee and your company is now facing insolvency, our specialist insolvency solicitors can help. We’ll review your position, explain your options clearly, and support you in negotiating with lenders or managing any claims made under the guarantee.
Contents:
- When is a director’s personal guarantee usually required?
- What options are open to a director when giving a personal guarantee?
- Joint and several guarantees
- What happens to a personal guarantee if I have already left the business?
- What is the risk to a director on a company insolvency if they have provided a personal guarantee?
- Can I negotiate or limit my personal liability during insolvency?
- Is it possible to challenge or avoid the enforcement of a personal guarantee?
- How can we help?
When is a director’s personal guarantee usually required?
A personal guarantee is often a requirement of a bank when lending to a company, especially when it provides an overdraft facility. It may also be required of a landlord when entering into the lease of a commercial premises. Some particularly strong trade creditors might insist on it before dealing with a company, although this is not as common. Invoice discounters may also request a personal guarantee, along with the usual security by way of fixed and floating charges.
What options are open to a director when giving a personal guarantee?
Often a director has very little or no negotiating power when it comes to obtaining a loan from a lender. They either must provide a personal guarantee or forgo the agreement.
While the giving of a guarantee may seem non-negotiable in many circumstances, there are some actions a director can take before giving a guarantee to try to mitigate the damage should the guarantee be called upon.
Firstly, take legal advice from an Insolvency Solicitor to ensure you are fully aware of what a personal guarantee will mean for you. Many banks will insist on the guarantor receiving independent legal advice in any event so that they are fully aware of the implications of giving the guarantee.
You need to make sure that the terms of the guarantee are very clear and that both sides know when and how the guarantee might be called upon. This should be discussed with your legal adviser before you sign anything. If possible, personal liability should be capped at a certain level (rather than agreeing to guarantee all of the company’s obligations under the lending agreement) and a limitation period should be set out in the guarantee so that claims cannot be pursued after an agreed expiry of time which is typically 12 years if the guarantee is signed as a deed.
Alternatives to a personal guarantee should always be explored with the lender, such as the option to take security over company assets instead. Often lenders will require both, but it very much depends on the circumstances and the lender.
Funding options should also be explored before giving a personal guarantee. There may be investment options rather than lending options in order to create more working capital, and these are less likely to require personal guarantees. Again, take legal advice before entering into any agreement, as there will inevitably be other considerations when taking on new investment, which will need to be weighed up.
Consider the options and costs of insurance policies that may cover the obligations under a personal guarantee.
If you are giving a personal guarantee with other directors, look at the whole situation, and in particular consider the personal finances of your co-directors, to assess your own risk. For example, if you own your own home but your co-directors don’t, then the risk to you when the guarantee is called in is going to be higher than for them. Maybe this can be reflected in the level of guarantee given by each director.
Maintain accurate financial records, which will help you to predict cash flow fluctuations, and will give you more time to look for alternative funding methods before the company reaches a crisis point and a personal guarantee is the only option.
Joint and several guarantees
If one or more directors have given a personal guarantee, the terms of that guarantee will usually state that the debt is owed jointly and severally. This means that the lender can pursue the full amount of the debt from any one or all of the directors personally. They cannot however be repaid twice, so can only ever receive the full amount of the loan outstanding, either from the company itself, or the director/s, or a mixture of a contribution from all.
If the directors do not have sufficient personal capital to meet a personal guarantee, then they risk a bankruptcy claim by the lender to recover the money. If that happens, all of the director’s assets can be used to repay the guarantee, including the director’s home.
What happens to a personal guarantee if I have already left the business?
A personal guarantee will continue in force even once a director has left the business as the guarantee is between the lender and the director personally. The director will be liable for the debt it has guaranteed unless and until the lender agrees to release them or transfer the guarantee to another director or where the terms of the guarantee allow for cancellation in certain circumstances.
What is the risk to a director on a company insolvency if they have provided a personal guarantee?
As directors often have little choice but to give a personal guarantee for some essential borrowing, they invariably end up doing so. When signing a guarantee no-one likes to think that the worst will happen and it will be called in, but if it does, it can have drastic personal consequences for the directors, particularly when the company enters an insolvency situation.
Generally, when a company goes into formal insolvency the return to a company’s creditors are limited to the company assets available, and the directors are protected by the ‘corporate veil’ which means their liability personally is only up to the value of their shareholding.
If there are insufficient assets available to meet company debt, which is almost inevitable on a company insolvency, then a lender who has the benefit of a personal guarantee from the directors will usually take a two pronged approach to recovering their loans. They will seek to recover their debt both from the company itself, and also personally from the directors.
Can I negotiate or limit my personal liability during insolvency?
Insolvency may be the most difficult time to negotiate or limit your personal liability as this is the time when the lenders will be calling on personal guarantees to recover their money. It may be possible to negotiate with the lender and reduce the amount being called upon under the guarantee or at least negotiate a payment plan to clear the debt in more manageable staged payments.
Is it possible to challenge or avoid the enforcement of a personal guarantee?
It is possible but you would need to have a strong argument and evidence as to why it cannot be enforced. You would need to seek specialist legal advice on the terms of the guarantee and how it was entered into to see if you may have an argument for non-enforcement.
Potential arguments for non-enforceability may include where the director was misled or pressured into entering into the guarantee, where there was a breach by the lender under the guarantee or where there was a condition in the terms of the guarantee which had not been met.
Lenders will typically mitigate this risk, by requiring directors to obtain independent legal advice before entering into a personal guarantee so as to avoid any questions over validity or enforceability at a later date.
How can we help?
Personal guarantees are often given by directors in a rushed situation where they urgently need more cash and have very little time to look at alternative options. As a result, they are forced into a guarantee that may be disastrous for them personally.
At Harper James our Corporate Solicitors will consider the terms of any proposed funding agreement with you, including a personal guarantee, and advise you on the possibilities of strengthening your personal position before signing up for a personal guarantee.
If the worst-case scenario happens, our Insolvency solicitors can provide you with specialist advice on what your obligations are under a guarantee that is called in, and work with you to reach the best solution for you in the circumstances.
