What is a Personal Guarantee Agreement and How Can They Affect Insolvency?
Business owners can be put under substantial pressure to give personal guarantees to get their new business up and running or to secure crucial funding for an already established business. In many cases, lenders, landlords and suppliers will only agree to do business if the company’s obligations are supported by a personal guarantee from one or more of the individuals who own it. But, however tempting it may be to be optimistic about the business’s future prospects, thousands of businesses go under each year. Therefore, business owners should never assume that defaulting on a loan or insolvency are beyond the realm possibility.
Personal Guarantee by Directors
Put simply, a personal guarantee places the director’s personal assets at risk should the borrower default. In this scenario, some or all his or her personal assets, including the family home can be sold or liquidated to repay the loan. Therefore, personal guarantees shouldn’t be given lightly or without a full understanding of the implications should the business go belly up.
There are a number of scenarios where a lender may ask a director to guarantee a loan or financial arrangement in case the amounts being borrowed can’t be settled by the business. These are some of the most common cases:
- business loans
- invoice finance agreements
- asset leasing arrangements
- trade supply
- property leases
The Effect of a Personal Guarantee During Insolvency
By giving a personal guarantee, the director promises that the company will stand by its obligations to repay a loan or pay rent and that he or she will do so if the company is unable to do so. Securing additional finance and giving the business a new lease of life are some of the pros of a personal guarantee. However, let’s also consider the cons:
- If a claim is made under the guarantee, the director will be liable to pay the company’s debt and if he or she doesn’t, the lender can take him or her to court to enforce a judgement debt against his or her personal assets.
- If there aren’t sufficient personal assets to cover the debt, this can damage the director’s credit rating and he or she may be made bankrupt.
- As a result of being made bankrupt, the individual can’t be company director again while the bankruptcy remains “undischarged” or the individual hasn’t been released from personal liability for the debts. Additionally, he or she is legally prohibited from managing, forming or promoting a company without the permission of the court.
- If several directors give a personal guarantee or a single guarantee jointly to the same lender, in the case of insolvency, the lender doesn’t have to take action against all the directors but can claim the whole amount from just one guarantor.
Key Considerations about Personal Guarantees for Directors
Directors considering providing a personal guarantee to one or more creditors for their business should consider capping their liabilities. Frequently, directors fail to reach an agreement with creditors on this issue, but it makes good business sense to limit the financial responsibilities where possible and to establish contractual clarity on the subject. By doing so, the potential for disagreements and legal disputes can be limited later on. Even issues that may initially seem insignificant can be worth clarifying because they can become vitally important if the company enters into insolvency.
Can You Get Out of Personal Guarantees?
It’s also best to negotiate personal guarantees at an early stage, regardless of whether or not the company is at risk of insolvency. It can help to have written evidence and documents to refer to in support of any arguments made during negotiations. Please contact us on 020 8444 2000 at any time for free and confidential advice about your situation.