A personal guarantee agreement holds a company director personally liable if the business is unable to repay money owed. A personal guarantee agreement is typically a requirement when taking out a business loan.
There can be any number of reasons why a company director might be willing to provide personal guarantees in support of a business loan, property lease or line of credit.
Typically, the individual offering these guarantees will assume that the lender will never have any cause to call in their loans in a manner that affects their personal assets
What is a Directors’ Personal Guarantee?
When seeking funding for a business, many business loans, financial arrangements, or leases require the company director to sign a personal guarantee as a form of security for the lender. Since the limited company structure is designed to keep the directors’ personal finances completely separate from those of the business via the limited liability status, these clauses are extremely significant and should not be undertaken lightly.
Signing a directors’ personal guarantee is referred to as ‘piercing the corporate veil’ and it means that, in the case of insolvency, the guarantor has the right to come after your personal assets. For this reason, we always advise considering personal guarantee insurance which is a relatively new offering, but brings a lot of piece of mind
A director’s personal guarantee may be used in a variety of situations, including:
- bank loan or overdraft applications
- invoice financing (discounting and factoring) arrangements
- commercial property (eg where a business is a tenant)
- trade supply deals (eg where payment is not made in advance)
- investment deals
There is sometimes a cap applied to directors personal guarantees, which allows the director to limit the potential level of their financial liabilities.
How Do I Get Out Of A Director’s Personal Guarantee?
Getting released from a director’s personal guarantee can be difficult. Some guarantees contain terms that limit your liability to a specific time or transaction, but it’s also common for directors’ guarantees to be ongoing and even apply when:
- You have resigned as a company director
- The company has stopped trading
- The company has been wound up
Some directors are shocked to be approached by creditors attempting to enforce a personal guarantee for the debts of a company they are no longer involved in. Potentially, you could even be held personally liable for company debts that are incurred by other people running the company long after you have left.
There are a few routes you could potentially take to be released from a director’s personal guarantee:
- Repay the debt in full
The simplest way to be released from a personal guarantee is to repay the borrowing in full. This could be done either by refinancing without a personal guarantee or by settling the debt. Either way, you must make sure the lender will release you from the guarantee as this may not be automatic.
- Ask to be released
Alternatively, you could ask the creditor to release you from the guarantee. This will only happen if you can convince the lender that the company is in such a strong financial position that there’s no risk of a default on the loan.
To do that, you will need to present:
- Complete financial statements for the last two or three years
- Realistic business projections for the next few years
- Plans to address any weaknesses in the business’s finances
- Proof of alternative security you could provide in place of the personal guarantee
If you plan to leave the company, you should write to your creditors and ask them to release you from the guarantee. You could suggest that they request a personal guarantee from the incoming director(s) in your place.
- Get the guarantee set aside
If those methods are unsuccessful, you may be able to get the guarantee set aside if you can prove there was an element of misrepresentation or misleading conduct in the way it was obtained.
What to do when a creditor calls upon a personal guarantee
If you suspect one or more creditors is likely to call upon a personal guarantee, you must act quickly. Realistically, you have just a handful of options:
- Settle the debt: if the company has the resource to settle the debt, talk to your creditor before it reaches crisis point. Most creditors want cash or payment in a straightforward manner rather than starting the process of taking charge of personal assets. See if the company can agree an alternative payment schedule.
- Settle the debt personally: if the company is unable to settle the debt, you may choose to settle the debt personally, or negotiate terms to settle the debt personally. If necessary, use this to buy yourself some time whilst you consider the best way forward for you and the company.
- Confront the larger problem: if the company is unable to settle the debt, you need to deal with this larger problem. Is your business viable? If the company has a viable future, but needs some attention in the immediate term, a CVA or administration may be an appropriate solution. Alternatively, if it is no longer viable, liquidation may more suitable. The best way to protect your personal liabilities will be to address the company’s longer-term problems.
If your company enters into formal insolvency procedures, it depends upon the type of insolvency procedure, and in some cases the discretion of the creditor whether your PG will become payable. However, depending on which is the most suitable approach for your business, we can help you find a manageable long-term solution or strategy to deal with both your personal and business finances.
Are they Enforceable?
The extent to which your personal savings and assets will be at risk depends on the kind of personal guarantee you have signed. For that reason, it’s important you understand the risks involved and the potential outcomes before entering into any arrangement where a personal guarantee is required.
What Happens if You Default?
If a lender with a personal guarantee has not been repaid in full following the liquidation of the company, the next steps they take may vary depending on the value of the debt and the type of creditor they are. However, the typical routes include:
(1) Issue a statutory demand and begin bankruptcy proceedings if necessary
Typically, the first step a creditor will take is to issue a statutory demand. That will give you 21 days to either reach an agreement to pay the debt or to settle the debt in full. If you do not have the personal funds to settle the debt or to reach a repayment agreement, the creditor may choose to commence bankruptcy proceedings if the debt is over £5000, which it usually will be in the case of a personal guarantee.
(2) Apply for a County Court or High Court Judgement
The other route the creditor might choose to take is to apply for a County Court or High Court Judgement. If you are unable or refuse to pay the CCJ, the creditor can then apply for a writ of execution, which gives bailiffs the power to visit your home to seize goods that they can sell to recover the debt. Alternatively, they could apply for a charging order which will secure the debt against your home.
(3) Charging Order
A charging order does not necessarily mean you’ll have to sell your property. If a creditor wants to force the sale of your home, they will have to apply to the court for an order for sale. However, it does mean that if you do sell your home, your creditor must be repaid from the proceeds.
What are the implications in insolvency?
Lenders, landlords and suppliers often ask for a personal guarantee (PG) before agreeing to a deal.
As the name suggests, you personally guarantee to pay the money back if your company can’t pay in the future. The aim of this is to reassure lenders that any losses will be covered, should your company become insolvent or unable to repay the debt in the future.
It’s important to consider a personal guarantee carefully and be aware of the implications before you sign. Here are some useful things to remember:
- Not every lender will ask for a personal guarantee when you apply for a loan, or every landlord when you take on a property lease. However, many will include this in the contract, so it’s vital that you thoroughly check clauses for mention of PGs. If you know you are personally responsible, you can prepare for a worst-case scenario and plan accordingly.
- PGs are most commonly used when there is little recourse if things go wrong. For example, if you’re looking to hire equipment stock or a company car, you are renting the use of the machine or property, and therefore the provider wants to make sure they can get it back if the company runs out of money to pay.
- If your company becomes insolvent, or a lender is suspicious that there are financial problems, they may call in the PG, which you will personally have to pay back. It is not the company’s responsibility, as you personally guaranteed it, even though it was a loan or finance for the business. If the company no longer exists (ie is in liquidation), the debt is still valid, as you personally guaranteed it.
- If you and a business partner, or spouse, jointly agree to a personal guarantee, but for whatever reason they are no longer around or cannot pay, you will have to pay back the whole debt, not just half of it.
- It is possible to get out of a PG if the company is doing well by proposing better payment terms. A new agreement could benefit both parties.
- If the PG is called in, because the company is experiencing financial trouble, there may still be a chance to negotiate. It’s worth looking into if there is any way you can pay the full amount back. Taking you to court to retrieve the money could be expensive, so it may be preferable to them to avoid that and consider a new deal.
If a PG has been called upon, and there’s no way you can pay it back yourself, you should seek legal advice and consider personal insolvency procedures, such as an individual voluntary arrangement (IVA) or bankruptcy. These may seem extreme, but they could be the best options for you and your business in the long run.
What is a personal guarantee indemnity?
Some lenders may seek to add an indemnity to a personal guarantee. Indemnities go further than personal guarantees in that, if for any reason the underlying agreement between the lender and borrower fails, the lender can still rely on an indemnity.
A guarantee is a promise that if the borrower (the company) does not pay their debts, the guarantor (the director) will be obliged to make good on what is owing. It creates a secondary obligation – which means that, if the company is not liable, then neither is the guarantor. In contrast, an indemnity is a primary obligation on the company director to recompense any loss to the lender, whether or not the company is liable.