Director Personal Guarantees In Liquidation And Insolvency

This is a complete guide to personal guarantees in Liquidation and insolvency.

In this guide you’ll learn:

  • Why Director personal guarantees in Liquidation are an area of risk.
  • Why the risk is a personal one taken by a Director and why it is serious.
  • What needs to be considered before taking out a personal guarantee.
  • What can be done about a personal guarantee after it has been given.
  • Whether it will affect a Director’s credit rating.
  • Where a Director can go for advice.

Let’s get started.

Director Personal Guarantees In Liquidation

The risk arising from Director personal guarantees in Liquidation does not only arise in the event of insolvency. It can also occur when there is a default of an agreement that triggers the ability of a lender to call in and enforce the personal guarantee.

It is important that before you sign up for a personal guarantee you consider getting professional advice so that you are fully aware of the risks involved and that you can properly consider if you are prepared to take those risks.

There might be other options available to you other than accepting finance that requires the provision of a personal guarantee and from a Director’s personal point of view, this is likely to be preferable in the long term.

Highlights Of Director Personal Guarantees In Liquidation

  • Types Of Personal Guarantee
  • When Personal Guarantees Are Required
  • Advantages And Disadvantages Of A Personal Guarantee
  • Challenging Enforcement Of A Personal Guarantee
  • Director Personal Guarantees In Liquidation And Insolvency
  • What Is Personal Guarantee Insurance?

What Is A Personal Guarantee?

The desire for separation of a company’s assets and liabilities from the personal assets and liabilities of its owner is typically the basis of the start of most Limited liability companies. However, there are times when that separation may not be sustainable and a personal guarantee may be requested.

A guarantee has been defined by the online Cambridge Dictionary as:

a promise that something will be done or will happen, especially a written promise by a company to repair or change a product that develops a fault within a particular period of time

A personal guarantee is an agreement between a company Director and a creditor (typically a lender or a party providing finance to the company), to guarantee the debt. It is a promise by the company Director that if the company defaults on the debt they will satisfy it for the lender.

Director Personal Guarantees In Liquidation

If the company is unable to pay the debt when it is due for payment i.e. the company is insolvent, then the personal guarantee of the Director will be available to secure the creditor’s position. The effect of the personal guarantee is that if the company defaults on the debt then the lender can call in and enforce the guarantee. If the lender does call in the personal guarantee then that will involve the lender taking enforcement action and proceedings against the Director personally. That is why it is so important for a company Director to be aware of what they are taking on when they enter into a personal guarantee and in particular the company is wound up and goes into Liquidation.

Director Personal Guarantee Deed

A personal guarantee will typically be in a document known as a deed to deal with the legal complexities and to ensure it is valid and enforceable. For a contract to be enforceable it has to have what is known in contract law as ‘consideration’. This means that there has to be an exchange of value or a promise to do something in exchange as part of the bargain. In the case of a personal guarantee, there is no consideration provided by the company Director; consideration is provided by the company and the creditor providing funds. The company Director is acting as a pure volunteer as he or she is receiving no benefit from the transaction personally. Indirectly they might receive a benefit if the company is successful as a result of the provision of new finance for example. To overcome the consideration problem, instead of the legal document being a normal contract, it is signed as a deed.

Example Of Director Personal Guarantee Clauses

The following is an example of a personal guarantee that was referred to in a reported legal case published by the government’s Find Case Law website with its various clauses highlighted:

Personal Guarantees clauses

Types Of Director Personal Guarantees

The most common way a personal guarantee is put in place is when a company Director applies for a bank overdraft facility. The bank will want security. However for a reasonably modest sum of money, the bank will often be content to rely upon a Director’s personal guarantee, particularly if a company has no significant assets and is just starting up.

Director personal guarantees can take essentially two forms: secured personal guarantees and unsecured personal guarantees.

secured and unsecured Personal Guarantees

Unsecured Director Personal Guarantees

This is by far the most common form of personal guarantee provided by company Directors. The personal guarantee document is a promise by the company Director to satisfy the debt owed in the event of non-payment. The lender relies on the personal guarantee document as their security but there is no asset that the bank or creditor can look to or seize to repay the debt. As a result, if a personal guarantee is enforced against a company Director the lender will be an unsecured creditor of the Director personally. They will also be a creditor of the company at the same time.

Secured Director Personal Guarantees

A lender may as a condition of lending require a personal guarantee that is linked to a company Director’s personal assets such as their home. In exchange for providing funding to the company, they may take a charge over such personal assets of a Director. If the company defaults on the debt because it is unable to repay it then the company Director could lose their house when enforcement action is taken by the lender.

When Are Personal Guarantees Required?

Personal guarantees are often required when a small or medium sized business is seeking finance.

advantages and disadvantages of personal guarantees

Companies asked to provide a personal guarantee typically will be seeking finance in one or more of the following situations:

  • Bank Overdrafts
  • Commercial Rents
  • Trade Supply Arrangements
  • Unsecured Business Loans
  • Invoice Finance
  • Property Loans
  • Asset Leasing Agreements

Can A Director Limit Liability On A Personal Guarantee?

Director personal guarantees in Liquidation risk can be limited through negotiation with the lender. Some lenders may require a full guarantee to be provided and others may be more flexible. However, it is at the start of the relationship before a formal agreement has been reached that you stand the best chance of securing a limit or cap on the extent of your Director’s exposure under a personal guarantee.

It is very difficult to negotiate a cap when the business is struggling and about to enter into a formal insolvency process such as Creditors Voluntary Liquidation.

Advantages And Disadvantages Of A Personal Guarantee

With any risk-taking there are advantages and disadvantages of a Director providing a personal Guarantee.

advantaages and disadvantages of Director Personal Guarantees In Liquidation

Advantages

The advantages of personal guarantees are that the company will find it easier to obtain the funds that it needs. In a market where lenders may be risk-averse, it might be the only way to obtain finance without having to provide other forms of security over assets.

If the company has no assets available or they are already secured with other lenders a personal guarantee may enable a company to obtain finance that otherwise would not be available to it.

Disadvantages

The disadvantage of a Director providing a personal guarantee is that they expose themselves to the risk of personal bankruptcy if the company cannot repay the debt to the lender. This could mean that the company Director could lose their personal home and all other material personal assets as a result.

Once a personal guarantee has been provided it does not stop being enforceable if a company Director leaves the company. They may still be exposed long after they have stopped working for the company. If a Director is leaving a company due to a loss of confidence in their fellow Directors, this could result in an increased risk of exposure under the personal guarantee because they are no longer around to influence the performance of the company and therefore safeguard their position under the personal guarantee.

It is therefore important to consider matters carefully before rushing into such an arrangement and when exiting a company this will be one of the matters to consider carefully.

How Is A Personal Guarantee Called In?

A personal guarantee can be called in and enforced as with any debt.

How the debt is enforced depends on the approach adopted by the creditor.

letter of demand to call in debt

To begin with, the lender will usually issue a letter of demand asking you to make payment of the debt. However, if you are unable to do this then the matter can quickly escalate through other forms of debt collection and enforcement.

The lender can apply for a County Court Judgement (“CCJ”). To enforce a CCJ the creditor may look to send in bailiffs or High Court Enforcement to attempt to take goods away or enter into a controlled goods agreement.

Alternatively, the lender may seek to place a charging order over the Director’s personal property and attempt over time to sell the house to realise the debt.  They might serve a Statutory Demand. If they do this they will then have 21 days to pay off the debt or negotiate an arrangement. However, if the matter cannot be resolved then the creditor can start personal bankruptcy proceedings if the debt is over £5,000.

In view of these serious consequences for Director personal guarantees in Liquidation being called in, it is important to engage with the creditor and take advice at the earliest opportunity. Help is available and the earlier it is sought the more options there are that should be available. If help is not obtained at an early stage there will still be some opportunities to attempt to deal with matters but they may be more restricted.

Can A Personal Guarantee Be Cancelled?

The personal guarantee of a company Director can be cancelled. This would deal with the problem of Director personal guarantees in Liquidation.

It is rare once a personal guarantee has been signed that you can get out of it, especially in a Liquidation or insolvency process. Whilst it is not impossible; it is difficult to get a creditor to give up their security in such circumstances.

If a Director of a company has provided a personal guarantee and they are concerned about having some exposure in the event of Liquidation and or some other insolvency procedure, then it is a good idea to attempt to deal with it long before there is some real exposure. That will be the point in time that you have the best prospect of negotiating your risk down. It is hard to renegotiate from a position of weakness when a lender understands that a company is struggling. As ever it is better to negotiate the best terms at the start of your relationship when you are in the strongest position and lenders want your business.

A particularly good time to seek to cancel a personal guarantee is when the finance arrangement has been paid back. At that point, you have the best prospect of seeking to cancel the personal guarantee.

How Long Can A Personal Guarantee Last?

The period of time that a personal guarantee can last is for a period of twelve years from the date of default.

Why Does A Personal Guarantee Last So Long?

A personal guarantee can last for so long because it is what is legally known as a specialty debt. The limitation period for such debts is twelve years in light of Section 8(1) of the Limitation Act 1980:

An action upon a specialty shall not be brought after the expiration of twelve years from the date on which the cause of action accrued.

Can You Negotiate Out Of A Personal Guarantee

You can negotiate your way out of a personal guarantee and if this were possible this would deal with the problem of Director personal guarantees in Liquidation. However, once you have signed up then your negotiating position will generally not be a strong one and you have to ask yourself why would a lender give up their position.

It will be very difficult to do this if the company is struggling financially and on the verge of an insolvency process. Certainly, the longer you wait and the closer the company is to Liquidation then the prospects of getting out of a personal guarantee will disappear all the more.

can you negotiate out of director personal guarantees

However, there may be circumstances otherwise when you might be able to get out of a personal guarantee. For example, if you are restructuring the business finances, a new lender may be prepared to take on the original debt and not require a personal guarantee from you. You could then agree as part of the repayment of the debt that you are released from the original lender’s personal guarantee.

If you are particularly unhappy about having provided the personal guarantee and the company has some assets available you could look to provide security by way of either a fixed or floating charge over some of the company assets. In exchange, you could obtain release from your personal guarantee. It will all depend on the particular circumstances of your company’s situation.

When Can A Personal Guarantee Be Called In?

A personal guarantee can be called in based on the finance agreement that defines what gives rise to a default by the company. Once a default event has been triggered then the lender may well be able to make a call upon the personal guarantee.

Default events will often relate to those signs that the company is facing financial difficulties. So, for example, they might be anything that enables the lender to highlight as an insolvency event such as:

  • Registration of a country court judgment.
  • Being served with a wind up petition.
  • Breaching banking covenants.

All too often lenders such as banks are able to call in a personal guarantee at any time. In fact, if a default provision has been triggered a bank might call in the guarantee and in exchange require the company Director to change the company’s debt into a personal loan.

Director personal guarantees in Liquidation will be a very common default trigger leading to many lenders calling in Director personal guarantees.

Challenging Enforcement Of Director Personal Guarantees In Liquidation

In order to challenge the enforcement of a Director guarantee there are typically two ways this can be done. Firstly that the debt claimed from the company is not due and therefore disputed. Secondly that the personal guarantee document is invalid.

how are Director Personal Guarantees In Liquidation being challengedion

Disputes Over A Personal Guarantee

If a lender has failed to act in accordance with the agreement entered into with the company or been negligent this may be grounds for a company Director to challenge a call under the guarantee. If the terms of the company’s agreement with the lender have changed without informing the guarantor there might be grounds for a challenge. This can be a complex legal situation that needs to be carefully managed with professional advice.

Director Personal Guarantees In Liquidation And Insolvency

When a company is struggling a Director may all too often be looking at actions to try to save a business from an insolvency process such as Liquidation or Administration. However, dealing with the serious threat by a creditor seeking repayment of their debt needs to be carefully considered. A knee-jerk reaction to simply pay off that creditor may not be the right move to make. It depends on circumstances and that is why it is a good idea to get professional advice.

If such a creditor were to be a connected party such as a company shareholder or connected company for example, then there could be a danger that the payment to them could be seen as a Preference. When a company is insolvent Director duties typically require that creditors are treated equally. However, there are circumstances in which a Preference is deemed to be permissible, such as when a creditor is taking enforcement action against the company.

However, if a Preference payment is made that should not have been then this can have serious consequences for a company Director. It can lead to actions being taken by a Liquidator against the Director for misfeasance and breach of duty. In addition, the Insolvency Service can bring Disqualification Proceedings which can result in a Director being unable to manage a limited company for a period of typically years.

Director Personal Guarantees And Bounce Back Loans

It was a requirement when the British Business Bank (“BBB”) set up the Bounce Back Loan Scheme that lenders could not require a company Director to provide a personal guarantee. The guarantee the lender obtained was from the Government in the event that the company defaulted on the Bounce Back Loan and went into Liquidation.

Director Personal Guarantees in liquidation And Bounce Back Loans

The BBB said:

lenders are not permitted to require personal guarantees for the Bounce Back Loan Scheme. For sole traders or small partnerships, who often risk their personal assets when borrowing, the terms of the Bounce Back Loan Scheme means no recovery action can be taken over a principal private residence or a primary personal vehicle.

In the event (hopefully unlikely) that you believe you have signed a personal guarantee for a Bounce Back Loan that is being called in due to a default, it is important that you check your documentation carefully and consider seeking professional advice. It is a situation that should not arise and you should have good grounds to contest any such claim arising under such a personal guarantee.

Director Personal Guarantees And CBILS

If you have taken out a Coronavirus Business Interruption Loan then you may have been required to provide a personal guarantee that could at some point be called in if the company defaulted on the CBILS loan.

However, if the CBILS loan taken out was less than £250,000 then the same position applies as with Bounce Back Loans. Again the BBB set up this scheme and said that with loans less than £250,000 a lender was not allowed to obtain a personal guarantee:

For CBILS facilities below £250,000, personal guarantees cannot be taken by lenders in relation to the facility under the Scheme.

However, if the CBILS loan was for an amount of £250,000 or more, then lenders were entitled to require company Directors to provide personal guarantees:

For CBILS facilities above £250,000, personal guarantees may still be required, at a lender’s discretion, but they exclude the Principal Private Residence (PPR) and recoveries under these are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied.

If you are a company Director facing a call on a personal guarantee provided in respect of a CBILS loan over £250,000 then take professional advice because although personal guarantees could be obtained, enforcement under them is subject to various restrictions.

What Is Personal Guarantee Insurance?

Personal guarantee insurance is an insurance policy to deal with a Director’s risk of a call under the guarantee.

One such organisation, Purbeck Insurance Services offers such policies. It refers on its site to the following salutary warning:

When you sign a Personal Guarantee we understand it’s more than your signature on the line.

Director Personal Guarantee insurance

However, seeking to obtain such insurance is likely to involve a review of the company’s financial position and future projections to enable an insurer to weigh up its risk and price the insurance premium accordingly. Typically you will not be able to obtain personal guarantee insurance for 100% of the sum that could be claimed. You can anticipate the limit to be at 80% of this sum.

Since December 2000 the HMRC crown preference returned. As a result, this has meant potentially increased exposure resulting from Director’s personal guarantees in insolvency. HMRC regained its preferential status for certain debts such as VAT and PAYE. Those debts typically are substantial in insolvency cases so it is likely to significantly reduce the recovery a lender will make in the event of Liquidation. This in turn will have led (and will continue to lead to) many more calls being made under Director personal guarantees in Liquidation than otherwise might have been the case. As a result, it is more important than ever to get professional advice at the earliest stage.

Does A Personal Guarantee Affect Your Credit Rating?

A personal guarantee does not directly affect your credit rating. As there is no registration of personal guarantees a credit rating agency has no means to record them on its databases.

Personal Guarantees affect credit rating

However, that does not mean that a personal guarantee will never affect your credit rating. A Director’s personal guarantee in insolvency can affect your credit rating.  If a lender looks to enforce a personal guarantee and obtains a CCJ then that will be recorded on your credit file and therefore it will impact your personal credit rating. If a bank converts a company loan into a personal loan and there is then a default in respect of payments to service that loan this can affect your credit rating.

Getting Advice On Your Director Personal Guarantee Risk In Liquidation

If you are worried about a personal guarantee then help is available. Obviously, the most direct way you can avoid problems with Director personal guarantees in Liquidaton is to look to ensure that they are not called in by the lender. However, as we have seen with the global Pandemic the future is not a foreseeable event and can change at a moment’s notice.

In the event that a company has reached the point of no return and must enter Liquidation then we can deal with that for you and look to engage with the lender to see how the personal guarantee can be addressed. Where there’s Oliver Elliot there’s a way because we know insolvency inside out.

What Next?

Expert Advice Is Just A Click Away

If you have any questions in relation to Director Personal Guarantees In Liquidation And Insolvency then contact us as soon as possible for advice. Oliver Elliot offers a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.

Our expertise is at your fingertips.

By submitting this form you agree with the storage and handling of your data by Oliver Elliot. For more details, please read our Privacy Policy.

Disclaimer: Director Personal Guarantees In Liquidation And Insolvency

This page Director Personal Guarantees In Liquidation And Insolvency is not legal advice and should not be relied upon as such. This article Director Personal Guarantees In Liquidation And Insolvency is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

Recent Posts / View All Posts

Can You Backdate Your Salary?

Can You Backdate Your Salary?

| Director Transactions | No Comments
You Cannot Backdate Salary Why can you not backdate your salary? KEY ISSUE - THE WORDS OF THE COURT The Court in effect had this to say about the question…
What Is The Difference Between Earnings And Dividends?

What Is The Difference Between Earnings And Dividends?

| Director Transactions | No Comments
Earnings Are A Reward In Return For A Person’s Services Overview Of The Difference Between Earnings And Dividends What Is The Difference Between Earnings And Dividends? A troubling question and…
Directors Banned For 18 Years

Directors Banned For 18 Years

| Director Transactions | No Comments
Are you a Director concerned about disqualification? Directors Banned For 18 Years. If you are a director of an insolvent company, Oliver Elliot can help you address your concerns arising…
Can You Backdate A Limited Company Dividend?

Can You Backdate A Limited Company Dividend?

| Director Transactions | No Comments
Are you a Director looking to take dividends from your company? If you are a Director of a Limited company or a bankruptcy, Oliver Elliot can help you address your…