What Happens to Personal Guarantees in Liquidation?

If you’ve provided a personal guarantee for a loan and your company is liquidated, the creditor will require you to repay the debt in full.

A personal guarantee is a commitment made by an individual, typically a business owner or director, to repay a company’s debt if the company itself cannot make the payments. This legal agreement ensures that the guarantor becomes personally responsible for fulfilling the financial obligations should the business fail to do so.

Upon a company’s liquidation, personal guarantees are ‘activated’, making the individual who provided the guarantee personally liable for the debt or obligation specified. This means creditors can pursue the guarantor’s personal assets to recover the debt.

It’s essential to understand the specific terms of your personal guarantee as it could have various clauses outlining situations or conditions under which the guarantee may be enforced or annulled. Some personal guarantees might include clauses such as a cap on liability, a time limit for enforcement, or stipulations for renegotiation, which can affect your personal exposure.

>>Read our full article on What Happens to Directors in Liquidation?


What will Happen When the Personal Guarantee is Activated in a Liquidation?

If you have provided a personal guarantee for your company and the company goes into liquidation, you can expect the following:

  • The liquidator will contact you. The liquidator will contact you to request information about your personal assets and liabilities. This information will be used to assess your ability to repay the company’s debts under your personal guarantee.
  • The liquidator may ask you to sign a document confirming your personal guarantee. This document will be legally binding and will confirm your liability for the company’s debts.
  • The liquidator may ask you to repay the company’s debts. If the company’s assets are insufficient to repay all of the company’s debts, the liquidator may ask you to repay the debts under your personal guarantee.
  • The liquidator may take enforcement action against you if you are unable to repay the debts. If you are unable to repay the debts under your personal guarantee, the liquidator may take enforcement action against you, such as seizing your personal assets or declaring you bankrupt.

Secured vs Unsecured Personal Guarantees

A secured personal guarantee is backed by assets, either personal or belonging to the business. This might include property, vehicles, or other valuable items that can be used as collateral. In the event of a default, the creditor has the right to seize the secured assets to recover the owed amount. This type of guarantee reduces the risk for creditors, potentially resulting in more favourable borrowing terms for the business.

Unlike their secured counterparts, unsecured personal guarantees do not involve specific assets as collateral. This means that if the business fails to meet its debt obligations, creditors may pursue legal action to recover the debt from the director’s personal assets through court judgments. Unsecured guarantees pose a higher risk to directors, as their personal financial stability is directly exposed to the business’s liabilities without the buffer of designated collateral.

How Enforceable is a Personal Guarantee in Insolvency?

As a legal document (usually with a ‘first charge’ or ‘lien’ over a hard asset), personal guarantees are some of the most enforceable contracts in common usage.

While each financial provider has their own contracts, they ensure they are watertight to protect themselves from legal objections.

Assuming the terms stated in the personal guarantee contract are valid and correct, these are exceptionally tricky to get out of it.

Is there a Personal Guarantee Legal Loophole?

Loopholes are rate but some possible grounds for a challenge might include the following:

  • Has the creditor deviated from the original loan terms, perhaps by allowing more time than was specified or by increasing the loan amount?
  • Has the creditor behaved negligently with other security held against the same liabilities
  • Has the creditor altered the liability of the principal under the loan without informing the guarantor?

It goes without saying that challenging a guarantee is only worth doing with the services of an experienced lawyer, the funds to pay legal fees, and a strong argument with supporting evidence.

FAQs about Personal Guarantees in Liquidation

No, liquidation of the company does not automatically discharge a director’s personal guarantee. The director remains liable for the debts covered by the guarantee until they are fully settled.

Legal advice should be sought as soon as insolvency appears likely. There may be options such as negotiating with creditors to limit the scope of the guarantee or exploring alternative financing to fulfil the company’s obligations.

Revoking a personal guarantee during liquidation is generally not possible without the consent of the creditor. Moreover, the terms of the guarantee agreement may include clauses that specifically address this situation.

The statute of limitations varies by jurisdiction but is generally six years in the UK. However, certain actions by the creditor or director can reset this time period.

If multiple directors have provided personal guarantees, the terms of each guarantee will dictate how liability is shared among them. It is possible for one director to be held more liable than others, depending on the agreement.

Yes, resigning as a director does not automatically discharge a personal guarantee. The director will continue to be liable for the guaranteed debts unless explicitly released by the creditor.