Insolvency, Personal Liability and Personal Guarantees on Commercial Leases
Personal Guarantees for Company Leases (or any type of loan) can lead to serious consequences for the Guarantor. What are the issues and how can Insolvency Practitioners help?
The issue of Personal Guarantees can prove to be problematic but particularly when companies become insolvent. Guarantors of loans are often officers, and if the loans they have guaranteed cannot be repaid (including rent repayments on commercial leases as well bank loans, overdrafts and invoice finance – some suppliers also integrate Personal Guarantees within their Terms and Conditions of trade) then the lender can call in the Personal Guarantee and sidestep any formal insolvency process, when it becomes clear that the original company is unable to settle the resulting liability. They will then look to recover the debt from the Guarantor, personally. This can mean, for example, having to sell assets including the family home to pay the debt – or result in bankruptcy.
In this article, we look specifically at Personal Guarantees for leases on commercial property and give some guidance to officers who have given Personal Guarantees and are now facing them being called in because of the legacy of insolvency.
Personal Guarantees and Commercial Property Leases
These are common, especially if the company is new, or in a high-risk industry, typically in the hospitality, catering and travel sectors. Usually it is a director (or directors) of the company who give the Personal Guarantee, and if the debt (which may constitute unpaid rent, dilapidations or other lease related claims) cannot be paid, then the landlord can make the guarantor personally liable. Indeed, if the original lease has been assigned to a new party, there may still be a resulting claim if that party defaults under that lease.
It is not always certain that a landlord will make a call under the Guarantee, as it might not be commercially sensible for them to do so, as the Guarantor may have few or no assets, or the debt is too small, and may not be worth the cost of pursuing it through the Courts. Under these circumstances the landlord might simply concentrate on re-letting the property as fast as possible. However, this cannot always be relied on. Where there is more than one Guarantor and only one director has assets to pursue, then the Director with the assets could be pursued for the “FULL” amount of the debt.
Directors often ask us if they can get out of a Personal Guarantee. The answer is rarely and then it is more likely to be due to a legal issue with the Guarantee. This will require legal advice from specialist insolvency lawyers. What we do advise is for directors to be careful when signing a Personal Guarantee. Read the small print. Take legal advice at that point and remember to negotiate if you can. For example, the guarantee may be limited, where it can only be claimed on in the first 2 years of the lease or that the guarantee excludes certain assets such as the family home.
Generally, when signing a Personal Guarantee, an officer should seek clarification of any/all elements of the agreement that do not seem clear. They are often written in archaic language and can be confusing as to what they really mean. By so doing, the scope for disagreements and disputes later can be limited, especially if it comes to an insolvency situation.
Alternatively, it might also be worth considering taking out Personal Guarantee insurance. Coverage amounts are typically up to 70% of the stated value of a personal guarantee, at the discretion of the guarantor, up to a policy limit established by the insurer. Such insurance can be expensive but can be available for existing or new Personal Guarantees, so is worth considering on a business-by-business basis.
What can be done to avoid the Guarantee being called upon?
The time to start worrying about Personal Guarantees is when the company starts showing signs of financial distress, not when it is already insolvent and in deep trouble. This is when officers need to act, as there will frequently be more options available. The longer an action is delayed, the greater the likelihood of serious personal liability problems .
Whenever a business is in financial difficulty, and is struggling to pay its debts, the officers should seek advice from a Licensed Insolvency Practitioner. Detailed and expert advice can be provided as to the best course of action for all parties.
Perhaps the most important thing Insolvency Practitioners can do is try and ensure that the guarantee is not called in, and that could mean seeing if we can find a way to save the business, which is always our first objective. Two options that could be available are a Company Voluntary Arrangement or a Company Administration. If, however, the business is not viable and cannot be saved the option may be to go into Liquidation. We can then assist officers to talk to the landlord who instead of calling in the guarantee can come to a negotiated settlement.
There are three main options available to insolvent companies:
- A Company Voluntary Arrangement (CVA)
CVAs are formal debt repayment arrangements that consolidate a company’s unsecured debts into affordable, monthly instalments, tailored to what the company can afford. These arrangements usually last five years, and once concluded, any remaining unsecured debt is written off.
- Company Administration
In Administration, more substantial restructuring is required to alleviate the company’s insolvency. A licensed insolvency practitioner takes control of the company and makes the necessary changes to make it appealing to potential buyers. The process protects the company from creditor pressure and legal action for the duration of the procedure.
- Closing a company using a Creditors Voluntary Liquidation
If a CVA or an Administration is not feasible because the debts are simply too big to save the company, then the directors can close the company in a structured, orderly manner by using a Creditors Voluntary Liquidation (CVL). Closing a company down through this procedure draws a line under the insolvent company and gives directors the opportunity to start afresh. Doing so is often preferable to waiting for creditors to wind-up the company through compulsory liquidation, over which the directors have little control.
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 principal options are:
- Taking action to put things right before the Guarantee is called in;
- Come to a negotiated settlement in order to satisfy the Guarantee, or
- In the worst case go bankrupt.
As always, the sooner action is taken the more options are available. Please contact us or call any of our offices, below, for a FREE and NO OBLIGATION initial discussion on the ‘phone, through Teams or ZOOM or over a coffee about insolvency and Personal Guarantees.
Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley: