Company directors are routinely asked to provide personal guarantees when securing a loan or other finance arrangement. But what happens if the company becomes insolvent and cannot pay back its debts?

In these situations, the impact of providing a personal guarantee can be severe. If the company goes into liquidation or insolvency, directors may find the corporate insolvency impacting their personal finances.

This article will explore the potential consequences of director personal guarantees in liquidation and insolvency.

Director Personal Guarantee

What Happens to Personal Guarantees in Liquidation?

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 that creditors can pursue the guarantor’s personal assets to recover the debt.

Once liquidation occurs, the insolvency practitioner will collect the company’s assets and distribute them to satisfy creditor claims. If the assets are insufficient to meet all the liabilities, the personal guarantee comes into effect. Creditors who hold such a guarantee can then initiate legal action against the individual guarantor to recover the remaining balance.

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 is an Unsecured Personal Guarantee?

An Unsecured Personal Guarantee is distinct from a secured guarantee primarily because it is not tied to specific assets or collateral. This means that if the company defaults on its obligations, the creditors can pursue a wide range of the guarantor’s personal assets for repayment.

Why someone might choose an unsecured guarantee over a secured one could be due to several reasons:

  1. Lack of Assets: The individual may not have substantial assets to offer as collateral but still wishes to support the company’s financial endeavours.
  2. Simpler Process: Unsecured guarantees often involve less administrative burden, as there is no need to value or register assets as collateral.
  3. Flexibility: Without tied assets, the guarantor retains more flexibility in their personal financial arrangements, as none of their assets are encumbered by the guarantee.
  4. Quick Approval: In some cases, creditors may be willing to expedite loan approvals without the need for lengthy asset evaluations, if an unsecured personal guarantee is provided.

However, the risk involved is considerable. Because the guarantee is unsecured, the guarantor’s liability is effectively open-ended, exposing a wide range of personal assets to potential legal action for debt recovery.

What is a Secured Personal Guarantee?

A Secured Personal Guarantee is a legal commitment wherein an individual pledges specific assets as collateral to guarantee a company’s debt. In a secured guarantee, the individual’s liability is generally limited to the value of the pledged assets, offering a degree of risk mitigation.

Assets commonly used as collateral in a Secured Personal Guarantee include property, vehicles, stock holdings, or other valuable items. The nature and value of the assets are typically assessed and documented during the guarantee setup process.

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.

How Enforceable is a Personal Guarantee?

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?

It may be possible to challenge the enforceability of a personal guarantee and/or negotiate a settlement figure less than the amount guaranteed.

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.

‘Capping’ the Directors’ Liabilities?

Every personal guarantee is different, so you should check the small print for your particular situation or consult a specialist to receive advice for your business.

If your guarantee does not contain such a clause, but your company has become insolvent, it is technically possible to negotiate with creditors that personal guarantee obligations be removed, though it is difficult to do so.

For obvious reasons, creditors are rarely inclined to give up this safety net.

If you are approaching insolvency and have a guarantee in place, your chances of negotiating leniency around this would be strongly improved by prompt action.

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.

If the personal guarantee specifies that it covers both secured and unsecured debts, the director will be liable for both. The terms of the guarantee will dictate how each type of debt is treated during liquidation.

Generally speaking, personal guarantees are highly enforceable, requiring specific circumstances and the services of an experienced lawyer to get out of.

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.