As a director, you may be asked to provide a personal guarantee to secure credit for your company. While personal guarantees can be a useful way to obtain funding, they also come with significant risks.
If your company becomes insolvent, you may find yourself personally liable for the debts, putting your personal assets at risk.
However, not all personal guarantees are enforceable in the event of company insolvency. In this article, we will explore what an unenforceable personal guarantee is, how it works, and what you can do to protect yourself.
What is a Personal Guarantee?
A personal guarantee is a legally binding agreement where a director or another party agrees to take responsibility for a company’s debts if the company cannot pay them. Personal guarantees can be used to secure credit from lenders, suppliers, or other creditors.
If your company becomes insolvent, and you have provided a personal guarantee, the creditor can call on you to pay the debt. This means that your personal assets, such as your house, car, and savings, could be at risk.
What is an Unenforceable Personal Guarantee?
An unenforceable personal guarantee is a personal guarantee that a creditor cannot enforce in the event of company insolvency. This means that if the company is unable to pay its debts, the creditor cannot call on the director to pay the debt under the terms of the personal guarantee.
An unenforceable personal guarantee may arise in several situations, including:
- Lack of formalities: If the personal guarantee is not properly executed, it may not be enforceable.
- Misrepresentation or undue influence: If the creditor or another party has misled the director into providing the personal guarantee, or if the director has been put under pressure to provide the guarantee, it may be unenforceable.
- Unfair terms: If the terms of the personal guarantee are deemed unfair, they may be unenforceable.
How to Protect Yourself from Personal Guarantee Liability
To protect yourself from personal guarantee liability, there are several steps you can take:
- Negotiate the terms of the personal guarantee: Before signing a personal guarantee, negotiate the terms with the creditor to limit your liability.
- Seek legal advice: If you are unsure about the terms of the personal guarantee, seek legal advice to ensure that you understand the risks involved.
- Consider alternative sources of funding: If you are uncomfortable with the risks of a personal guarantee, consider alternative sources of funding that do not require personal guarantees.
- Monitor your company’s financial position: Keep a close eye on your company’s financial position to ensure that it remains solvent and can meet its obligations.
How to Determine if a Personal Guarantee is Enforceable
If you have provided a personal guarantee, you may be wondering whether it is enforceable in the event of company insolvency. To determine the enforceability of a personal guarantee, you should consider the following factors:
- Formalities: Check whether the personal guarantee was properly executed, and all formalities were observed.
- Misrepresentation or undue influence: Determine whether the creditor misled you into providing the personal guarantee, or if you were put under pressure to provide the guarantee.
- Unfair terms: Assess whether the terms of the personal guarantee are deemed unfair.
- Financial position: Consider the financial position of your company and determine whether it is able to meet its obligations.
- Legal advice: Seek legal advice to review the personal guarantee and determine whether it is enforceable.
If any of the above factors suggest that the personal guarantee is unenforceable, you may be able to challenge the creditor’s right to enforce the guarantee in court.
The Risks of Providing a Personal Guarantee
Providing a personal guarantee carries significant risks, especially in the event of company insolvency. If your company cannot pay its debts, the creditor can call on you to pay the debt under the terms of the personal guarantee. This means that your personal assets may be at risk, including your house, car, and savings.
Furthermore, a personal guarantee can also affect your credit score and make it difficult for you to obtain credit in the future. This can have significant implications for your personal and professional life.
Frequently asked questions
Personal guarantees are legally enforceable contracts that become enforceable the moment they are put in writing. A guarantee's validity is dependent on the details outlined in the specific guarantee and is not fixed in time.
You can only lose your house with a personal guarantee if you fail to pay the outstanding amount. When you, as a business owner or director, sign a personal guarantee, you're putting your personal assets on the line, including your home. If your business can no longer keep up with loan repayments, you, and potentially your family, could suffer as a result. How enforceable are personal guarantees?
Can I lose my house with a personal guarantee?
Conclusion
Providing a personal guarantee is a significant responsibility that should not be taken lightly. While personal guarantees can be useful for obtaining credit, they also come with significant risks, especially in the event of company insolvency.
It is important to understand what an unenforceable personal guarantee is, how it works, and what you can do to protect yourself. By negotiating the terms of the guarantee, seeking legal advice, considering alternative sources of funding, and monitoring your company’s financial position, you can reduce your personal liability and protect your assets in the event of company insolvency.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.