“We are unsure about what to do with our personal guarantee, can you help?”
Personal guarantees are a standard means by which financial institutions protect themselves when lending money to limited companies. When a director signs a ‘personal guarantee’, it is a legally binding waiver that allows the piecing of the corporate veil during debt recovery. In such cases, the company director’s personal assets may become liable for a business debt.
This page has been written with the hard-suffering director in mind who is desperately trying to run his/her business but appears to be thwarted at every twist and turn by banks and suppliers who are intent on doing away with the limited liability status of the company. This page will cover some of the fundamental issues surrounding personal guarantees.
What is a Director’s Personal Guarantee?
Many business loans, finance arrangements or leases require the company director to add his/her personal guarantee, backed by their own assets. Since the limited company structure is designed to keep the director’s personal finances completely separate from those of the business, these clauses are extremely significant, and should not be undertaken lightly. Signing a director’s guarantee is known as ‘piercing the corporate veil.’
Do Personal Guarantee’s Cap a Director’s Liabilities?
Every personal guarantee is different so you should check the small print for your particular situation, or consult a specialist to receive advice. 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.
Are Personal Guarantees Enforceable?
They are enforceable – the standard practice would be for a creditor to take the debtor to court, with the intention of requesting them to enforce a judgement debt against his personal assets.
That said, there are legal precedents for the challenging of a creditors right to call a personal guarantee. It is recommend you seek legal advice to assess whether your case has grounds to challenge the validity of a creditor’s case.
What happens to a Directors’ Personal Guarantee in Insolvency?
Keep in mind that most personal guarantees are written so that the company does not have to liquidate to be ‘called in’, but may only be in arrears, or may have had a CCJ against the company and even simply not followed terms & conditions. Whatever the reason you must act quickly so seek specialist personal guarantee advice sooner rather than later if your company is insolvent or in financial difficulty.
Do not bury your head in the sand and hope the personal guarantee problem will go away.
The most common problems with director’s personal guarantees arise over time but usually become real when a company is liquidated and the main debtor (your company) is not in a position to pay. It is worth understanding a personal guarantee is not a secured liability, it is unsecured. The debt still remains unsecured unless it is secured by other means such as; a debenture on the company assets via fixed or floating charge, or a fixed second, charge on the family home.
These personal guarantees can take quite a few shapes and will often depend on the business that you are involved in.
What is the Impact of Director’s Personal Guarantee During Administration?
Although administration is intended to put a protective ring-fence around a company’s financial affairs, this does not extend to personal guarantees. In cases of insolvency (including administration), the usual scenario is that the guarantee provider will immediately issue a demand for the full balance. Directors should expect to receive a fairly aggressive statutory demand letter not long after the insolvency is announced requesting full payment (plus interest and charges).
The use of the word ‘personal’ in ‘personal guarantee’ is the clue that this type of guarantee falls outside the usually limited liability offered directors of a limited company.
Any loan signed by a director is likely to have a clause which allows the lender to recall that money, at any time. Known as the ‘Insolvency Clause’ this is essentially a protective policy for the loan company loan stipulating that, even in cases of insolvency, the loan will still be viable. This is the key to the ‘personal’ liability incurred by directors who have signed these documents.
Director Cannot pay
When a director cannot pay back the guarantee, then the loan security will be called in. In a company administration, for example, where a director has put up his house as a guarantee, this might mean he is forced to sell the house in order to satisfy a creditor.
An interesting situation arises when, if the creditor (ie the bank) then receives their money as a part of the administration, the director that has had his guarantee already called on would become what is called a ‘subrogated creditor.’ He has the right to contact the IP and inform them that any dividends payable on the estate will now be due to himself. Presumably, the bank will need to confirm this.
How are Director’s Personal Guarantees Affected by Winding Up Petitions?
Once a winding up petition has been issued by an angry creditor, a director or guarantor who is personally liable for some of the ltd company’s debts must be careful how they respond. They cannot offer to pay the debt from company funds, assuming the bank account has not been frozen. The reason is simple this would be regarded as a preferential payment.
Banks typically have the right to call in the personal guarantee at any time. If the company runs into difficulty, the bank will usually convert the unpaid company debts into a personal loan often interest-free. This allows the loan to be paid off from any personal assets and income that the director earns after the insolvency of the company, rather than having to find a lump sum immediately. The lender may decide to review the situation at a later date to increase payments so that the debt can be paid off in a reasonable amount of time.
The best course of action in this situation is for guarantors to act before the liquidation and seek advice promptly because once the company goes into formal insolvency, the bank will pass the file to the collection department and this window of opportunity is closed.
When a trade Creditor calls on a Personal Guarantee
Directors’ Personal guarantees are frequently used on trade accounts within the construction industry. Trade accounts tend to have personal guarantees as security for credit the company is provided. In some cases, directors will be unaware that they have signed them. Trade creditors can be more stressful than the banks as they want immediate payment. Creditors in certain sectors can be much more aggressive than others in their approach, and this is because the amounts owed are typically less than £10,000.
Personal Guarantees in The Building & Construction Industry
A builder, joiner, electrician or a plumber will have building and construction related, supplier personal guarantees from the larger suppliers such as Travis Perkins, Wolseley, Plumbase and so on. Typically, a lot of major suppliers are likely to have personal guarantees hidden away in the terms and conditions of any credit agreement. If everyone could strike them out before signing or didn’t sign the agreement at all the suppliers would have to change the way they did business, or go under. Whilst the suppliers have a role to play, some of the suppliers have their own legal teams; they can be very aggressive and will very often wind up a company first, then happily threaten the director with personal bankruptcy or seizing personal assets.
When you are offered a credit agreement stand your ground and cross out the reference indemnifying the agreement or personally guaranteeing the liability. At worst, restrict the amount of the liability and write in plain English on the agreement that you will not accept any liability over and above this figure, irrespective of anything written on this agreement date. This may give you grounds later if the worst happens. Ideally, confirm to the manager in writing and/or email your understanding and keep this with the agreement in a safe place. Initial any alterations.
If the worst comes to fruition and dependent on the amount owed, we can usually negotiate with the supplier and come to an arrangement on your behalf by working closely with you. We do not charge for this service if you use our Insolvency Practitioners.
Call 08000 746 757 to speak with a personal guarantee specialist who can help.
What is a Personal Guarantee on a Lease?
In principle, there is little difference to the director responsibilities when it comes to leasing personal guarantees as the company is likely to be the main debtor and the director will typically sign as a guarantor. However, it may be that there are more settlement options available.
In the main, finance companies are generally easier to deal with and not as aggressive as suppliers when looking at lease personal guarantees, regardless, the key is to get them onside as quickly as is possible. Relationships count for a lot so keep on your account manager’s good-side.
Lease agreements are generally long-term rental agreements without an asset value and we are assuming that this is the case for the purposes of this page. If there is an asset value (via lease purchase for example) then look under Hire Purchase below. It is also worth understanding the agreement is very unlikely to be a non-participating agreement, so not covered under the consumer protection act. The bottom line is you as a director will not have the same protection.
Lease personal guarantees from an insolvency perspective are more easily dealt with as any liquidator is unlikely to have an interest in them as they do not normally provide an asset value and are usually a liability. I mention this in case the director is considering continuing to trade and wants to take the van/car lease with him/her to the new company for example. Provided you can get the finance company to agree to this arrangement called ‘novation’, this solves the lease personal guarantee issue.
If you cannot ‘novate’ the agreement then we can try to see if the finance company will waive the right to pursue the lease personal guarantee in lieu of a new agreement in the new company name assuming that you are starting up again. It may be that the new company will need to pass underwriting, but this is certainly worth a shot in getting rid of the ‘guarantee’ element.
A lot will also depend on what asset has been leased and which company it’s from, so always check the termination penalties in any agreement as they are often not as severe as initially thought, so the lease personal guarantee may be less than expected.
If you are not starting up again, finance companies are usually willing to negotiate terms and we will assist throughout this process and there is no fee for this service providing you use our Insolvency Practitioners.
Hire Purchase or Finance Lease Personal Guarantees
These personal guarantee agreements are similar to the lease arrangements above when considering transferring across to any new company. There is a key difference, however, if the company is going into an insolvent liquidation, in as much as there may well be an asset value. The simplest way to check this is to obtain a settlement figure from the finance company and then cross reference this against the value of the asset.
It is critical with hire purchase personal guarantee agreements to identify who owns the asset (right to title) and this can often be determined by simply calling the finance company and asking them, or check the agreement, or as a rule of thumb by calculating how many payments have been made. If more than two-thirds of payments have been made, it is likely that the company will have ‘right to title’. The relevance to the personal guarantee is that the directors may be able to sell the assets as opposed to the finance company selling them. A director with a personal guarantee on a hire purchase agreement clearly has a vested interest in obtaining a better return for the asset than the finance company, who will just want to dispose of it as quickly as possible and who also have ‘guarantees’ to fall back on for any shortfall.
The bottom line is that we will check through the agreements thoroughly and assist with any personal guarantee negotiations required.
A top tip is to ensure you always initial every page on any agreement. This ensures replacement pages cannot be inserted at a later date.
Can You Get Out Of Personal Guarantees?
Call 08000 746 757 to speak with a personal guarantee specialist who can help you before you liquidate.