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.

In this article we look at what Personal Guarantees are, what can happen if the terms of the Personal Guarantee are not met and what options a company Director who has given a Personal Guarantee has available to them. This is important if facing insolvency as a Personal Guarantee can involve a director’s personal finances.

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 cannot get the loans they need without giving a Personal Guarantee.

Often, the first port of call is the business’s main bank who if they turn an application down will usually do so on the basis of lack of affordability. This is one scenario where the business might then seek out alternative lenders because the reason why they needed the loan has not gone away – which ranges from needing extra funds to invest and grow to needing funds to get through a bad time. Ultimately a loan may well be secured, 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. 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 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.

What about Overdrawn Directors’ Loan Accounts (DLA)?

An overdrawn Directors’ Loan Account at liquidation is another thing that attracts personal liability. As with Personal Guarantees, we are also seeing an increase in enquiries from struggling companies where overdrawn Directors’ Loan Accounts are an issue. Anecdotally, it is commonly accepted in the Insolvency profession that between 75% and 80% of business insolvency cases involve overdrawn director loan accounts.

See this article for more details about overdrawn DLAs . In our experience DLAs are often misunderstood – especially at the SME level – especially that an overdrawn DLA at liquidation adds to any personal liability (such as a Personal Guarantee) that a director faces at liquidation and must be repaid.

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 (or an overdrawn Directors’ Loan Account) 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.

Please contact us or call any of our offices, below, for a FREE initial discussion on the ‘phone or over a coffee.

Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley: