Dealing with a Personal Guarantee
If you are a company director there are circumstances in which you may be asked to provide a personal guarantee in support of a loan, or other credit application by the limited company.
Where you do provide a personal guarantee, it gives the lender additional assurance that you will be personally liable to repay what is outstanding, should the company become insolvent in the future.
In many cases this may be a decision worth taking and indicates that you (as a director) have confidence in the company’s financial future. However, if a company shows financial strain or has increasing liabilities then it is wise to consider the overall position in closer detail.
Key considerations before signing a Personal Guarantee
Any director considering whether (or not) to provide a personal guarantee should consider the following points:
- Prepare and scrutinise financial projections and business plans. You are more likely to be able to mitigate a potential liability under a personal guarantee if you monitor any unexpected changes to financial projections.
- Consider whether the business could raise finance in another way. Does the company have any surplus assets which could be realised in order to inject working capital? If not, think about asset refinance, crowdfunding or other funding options.
- Consider your personal financial position and your ability to repay the borrowing if the company is unable to in the future. If becoming liable for company borrowing would cause you significant distress, or even render you personally insolvent, then proceed with caution.
- Get clarity on key clauses to the proposed agreement and agree an upper limit for the level of your financial responsibility under the guarantee, if at all possible. Establish whether the proposed agreement requires you to provide any security in relation to your personal assets and if you are in any doubt, seek independent legal advice.
What happens if I have a PG and my company becomes insolvent?
Personal guarantees are legally binding agreements and are enforceable. There are some precedents for challenging whether a creditor has the right to call upon a guarantee provided but this action is only worth considering based on the advice of a suitably experienced lawyer and could be costly.
In cases where a company is insolvent (including administration and voluntary liquidation) it is likely that the creditor will issue a demand for the full balance fairly immediately. Usual practice would be for the creditor to request repayment of the outstanding balance, in full. If for any reason the person who provided the guarantee is unable to repay the amount due, the creditor could take steps to obtain a judgment, with a view to enforcing it.
Getting the right advice
A liquidator (appointed insolvency practitioner) will not be able to advise you on what action to take in respect of your liability because their duty is to the company itself. However, you will be advised to seek help with regards to your personal affairs where it is necessary to do so and the liquidator dealing with the company’s affairs may be able to help you source the appropriate advice.
Our Insolvency Practitioner is experienced in dealing with all aspects of corporate and personal insolvency. If you are concerned about a personal guarantee provided as a company director then contact us to arrange a free and confidential consultation.
If you require any further information, help or advice please do not hesitate to contact us for a no obligation discussion.