Understanding Directors’ Personal Guarantees and Liquidation

What is a personal guarantee?

A personal assurance is a security arrangement provided by a director of a limited company to secure company loans. 

Although the business is accountable for monthly repayments of the loan or finance agreement, if the company struggles to meet these obligations and goes into liquidation, the duty to repay the outstanding money will shift to the director. The director is anticipated to utilise personal funds to settle the remaining balance.

 

Director’s personal guarantee- what is it?

A personal guarantee renders a company director personally responsible for company borrowing if the business can’t repay the owed money and goes into liquidation. This offers extra security for the bank or finance provider, making them more inclined to lend money to a company when a personal guarantee is provided.

Offering a personal guarantee might be the sole practical means for a director to secure external funding at a competitive rate. The director may extend a personal guarantee with the assumption that the lender will never need to invoke it.

If the company can meet the agreed repayments throughout the loan term, then providing a personal guarantee will not affect the director. Regrettably, if the business encounters financial pressures and cash flow issues jeopardising its viability later on, the director who offered the guarantee may become personally accountable for settling the remaining loan amount.

Hence, it’s crucial for anyone providing personal guarantees to secure company borrowing to meticulously contemplate the consequences of the company becoming insolvent in the future.

Putting your signature on a personal guarantee can result in a situation where your entire financial standing is at risk. Directors must understand that what may appear as a hypothetical and highly improbable situation of personally shouldering a substantial company debt can swiftly turn into a challenging financial reality.

 

Why would someone ask for a personal guarantee?

The purpose of a personal guarantee is to assure lenders that they won’t be left completely without funds if a borrowing company can’t fulfil the agreed repayments of the loan or finance agreement.

Personal guarantees serve as a way to assure lenders or finance providers, allowing businesses to access the funds necessary for operation and pursuing growth opportunities.

 

When can you request a personal guarantee?

Personal guarantees may be sought to secure various commercial funding and finance options, such as:

• Directors bear personal liability for the outstanding balance if the company can’t repay.
• Bankruptcy can become a genuine possibility if the director is unable to settle the debt.
• This might necessitate selling personal assets or property for repayment.
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Is it possible to get out of a personal guarantee?

Negotiating the exclusion of personal guarantees is possible in certain instances, but the process can be challenging and will depend on the cooperation of lenders. 

It might be necessary to repay a portion of the loan, reducing the balance to a comparatively low level, before a lender agrees to waive the requirement for a personal guarantee.

The likelihood of successfully negotiating the removal of a personal guarantee is significantly higher if your payments on the relevant loan are current, and you have adhered to the loan terms.

If your lender is unwilling to eliminate the personal guarantee, you might explore the option of securing a new loan, free from a personal guarantee, to settle the remaining balance of the borrowing covered by the personal guarantee.

 

What can I do before signing a personal guarantee?

1. Seek guidance – Some agreements expose directors to greater personal liability for business debts than others, and even seemingly minor variations in the details of a guarantee agreement can have significant implications over time. Seek legal and personal financial advice before signing if you are uncertain about the terms.

2. Explore alternative avenues – Considering the potential consequences, the initial step should involve exploring whether there are alternative ways to secure the needed funding. If obtaining the required funds without offering a personal guarantee is feasible, that would generally be a more favourable choice for you as an individual.

3. Request clarification – Personal guarantee terms and conditions vary, so directors who have provided personal guarantees should insist on clarity regarding their responsibilities, precisely defining the extent of their obligations.

 

Joint and several personal guarantees: What does it mean by?

A joint and several personal guarantee occurs when there are two or more co-guarantors on a business loan, lease, or overdraft. Such guarantees render each party equally responsible for the entire amount owed.

This implies that the owed amount won’t be divided evenly among the directors who have signed the personal guarantee; the bank can pursue any of the directors for the complete balance. In a scenario with two co-guarantors, if one declines or cannot pay, the other director may be pursued for the entire amount owed.

Read More: 

• What happens to a Personal Guarantee after bankruptcy
• What is an unenforceable personal guarantee
• What are my options when presented with a High Court Writ
• What Options Do Sole Traders Have When Their Business Is Struggling
• Understanding Debentures and Floating Charges When Your Company Is Insolvent

 

Do you want to get advice on personal guarantees?

If you are a company director concerned about personal guarantees you provided for business borrowing, seeking advice from experts is crucial. 

Vanguard Insolvency operates a network of offices throughout the UK, with teams of corporate finance and insolvency practitioners providing guidance and support to directors during challenging times. Contact Vanguard Insolvency today to speak directly with one of our team members.