“What happens to the personal guarantee if we go into liquidation? Will I still be liable if we close the business?
A personal guarantee for a business debt remains unsecured and does not become a secured debt because the company is entering liquidation. The only exception to this would be if the personal guarantee is supported with a charge on the company assets (a debenture), this would make the debt secured.
It doesn’t matter who the personal guarantee is with, in the vast majority of cases a liquidator (appointed insolvency practitioner) will not be able to advise you on what action to take. The reason is simple while they may have a duty of care towards the directors when considering personal guarantees they are acting for the creditors (the people your business owes money to). So they are likely to be acting for the very companies you have personal guarantees with, so are not allowed to advise you personally by law.
In the liquidation engagement papers that you asked to sign before entering the liquidation process, you are advised to seek your help with regards to personal matters (personal guarantees) falling out of the liquidation. The advice required is not easily found as it is very unlikely that your accountant can provide such specialist information and, or help. You will need specialist insolvency and commercial help when dealing with personal guarantees and while there are legal similarities each bank responds differently; inevitably, this kind of advice can be very expensive due to the time and expertise required.
We are happy to say that at Jameson Smith & Co we provide this service free of charge when you use our liquidators. The most effective remedy for a personal guarantee threat is to contact us when you are considering company liquidation.
What are time-frames for personal guarantees in liquidation?
It’s worth understanding that most personal guarantees are not restricted to being enforced solely when the company is liquidated. In the majority of cases, all the lender/creditor needs are for you to breach the terms and conditions of the personal guarantee. In simple terms, this means that when the creditor/lender has lost confidence in the company’s ability to repay the debt. Once the confidence has gone, they can start to take action against the director/s personally. There are some exceptions to the rule but in the main, most ‘guarantees’ written since 2007 will be enforceable unless there are obvious mistakes made.
Typically, once the company’s creditors’ meeting has been held, which in most smaller cases will be between 3-5 weeks after, the creditor will then write to the director asking how they intend to repay the debt.
What happens with a secured personal guarantee in liquidation?
Typically, where a bank is involved they may have security on some property or a debenture on the company assets, but either way, things become more precarious for the director/s and caution must be taken and the correct advice accepted.
Usually, if there is a property involved, the bank are likely to have a charge and strict reporting guidelines as part of any agreement, especially if there is a mortgage/bank loan secured on a specific property. The charge will usually be registered at the Land Registry Office. If the bank loses confidence in these circumstances, they may put in place a ‘receiver’, whose job it is to protect the bank’s interests, not yours as a director. There is a duty of care for a liquidator, but the receiver, who is usually a specialist in his/her field will get the best return for the bank as quickly as is possible. Any shortfall will inevitably be made up by the personal guarantee so you can see where the motivation is here.
Where the personal guarantee is secured by a charge on the company assets, this is usually done by way of a fixed and floating charge, called a debenture. All you need to know about the fixed and floating charge is if it has a value to the company, then the debenture will more than likely include it from due invoices to desks, to plant and machinery.
In both cases, any liability from the liquidation of the company will be met by the sale of the assets and of course reduce, but not necessarily mitigate your personal guarantees.
It is also worth knowing that it is not always quite as straight forward like this, given the rules that are protecting the rights of unsecured creditors so that secured creditors don’t get 100% of the assets. Nevertheless, the security should reduce your personal liabilities proportionately.
If you have a personal guarantee, but think you need to put your company into voluntary liquidation, and you want some of the best support available; call 08000 746 757 ideally before company liquidation to speak to a specialist who can help – no strings attached.
Author: Mike Smith