Personal Guarantees are everywhere in Business. Directors must be vigilant
In a recent survey by Purbeck Personal Guarantee Insurance, it was found that 53% of SME owners had personal guarantees in their names for business loans at the end of 2020, whilst a further 9% took a loan with a personal guarantee in 2021. Such figures are not surprising. Regardless of whether the Personal Guarantees are secured or unsecured, banks and other lenders (and also the Covid-19 Recovery Loan Scheme) will require them from directors or guarantors in the event the loans cannot be repaid. This means personal liability, which can lead to the guarantors losing key assets or ultimately their homes.
As Insolvency Practitioner Antony Batty, points out below, however, it is not just bank loans, mortgages and leases that carry Personal Guarantees. At a time when insolvencies are on the rise, directors need to know where their Personal Guarantees are and what they can do if they have them and insolvency strikes.
Where can Personal Guarantees be found?
Almost all businesses will, at some stage, need some form of loan to establish themselves and grow. Bank loans, business mortgages, property leases are the obvious ones, and they almost always require a Personal Guarantee. However, there are many other forms of loan that usually require a Personal Guarantee, and sometimes this is not fully understood by directors as they are not called loans. All of the following are loans that usually require Personal Guarantees:
- Asset leasing agreements
- Invoice Finance Agreements
- Invoice factoring
- Business credit and charge cards
- Trade supply agreements
Antony Batty comments:
“So, for example, when a business decides to take on AMEX Corporate cards, it is very likely that the agreement will include a Personal Guarantee clause. Likewise, a trade supply agreement with a company such as Travis Perkins or Jewson may well contain a Personal Guarantee clause.
At the time of signing, a Personal Guarantee might not register as being important, but if insolvency strikes and a company defaults on a loan repayment of any kind that includes a Personal Guarantee, then the guarantors can become liable for the repayment. And that will come as a nasty shock to those that gave the guarantee.
It is also worth pointing out that sometimes it is not the director who signed a Personal Guarantee. In particular with trade supply agreements, an administrator, contract manager accounts employee, or even a shareholder/ former director may have signed the agreement (albeit with the agreement of, or authority from, a director), without even knowing there was a Personal Guarantee in the small print. The key point in such cases is that once the signature is on the document it will be difficult to escape from the legal obligations.”
Are Directors or Guarantors fully aware of Personal Guarantees? What can be done?
It may seem surprising but, more often than not, people forget they have given guarantees in the first place, and it is a nasty surprise when they are faced with the personal liability for the debt. As a first port of call, directors should get legal advice before they sign up to a Personal Guarantee. However, the problem often only rears its head when insolvency has already struck, so what can be done to avoid the Personal Guarantee being called upon? This is where an Insolvency Practitioner can help.
The time to start worrying about Personal Guarantees is when a company starts showing signs of financial distress, not when it is already insolvent and in deep trouble. This is when officers need to act, as there will frequently be more options available at this stage. The longer taking action is delayed, the greater the likelihood of serious personal liability problems.
Whenever a business is in financial difficulty, and is struggling to pay its debts, the officers should seek advice from a Licensed Insolvency Practitioner. Detailed and expert advice can be provided as to the best course of action for all parties.
Perhaps the most important thing Insolvency Practitioners can do is try and ensure that the guarantee is not called in, and that could mean seeing if we can find a way to save the business, which is always our first objective. Two options that could be available are a Company Voluntary Arrangement or a Company Administration. If, however, the business is not viable and cannot be saved the option may be to go into Liquidation. We can then assist officers to talk to the creditor who instead of calling in the guarantee can come to a negotiated settlement.
There are three main options available to insolvent companies:
A Company Voluntary Arrangement (CVA)
CVAs are formal debt repayment arrangements that consolidate a company’s unsecured debts into affordable, deferred monthly instalments, tailored to what the company can afford. These arrangements usually last five years, and once concluded, any remaining unsecured debt is written off.
In Administration, more substantial restructuring is required to alleviate the company’s insolvency. A licensed insolvency practitioner takes control of the company and makes the necessary changes to make it appealing to potential buyers. The process protects the company from creditor pressure and legal action for the duration of the procedure.
Closing a company using a Creditors Voluntary Liquidation
If a CVA or an Administration is not feasible because the debts are simply too big to save the company, then the directors can close the company in a structured, orderly manner by using a Creditors Voluntary Liquidation (CVL). Closing a company down through this procedure draws a line under the insolvent company and gives directors the opportunity to start afresh. Doing so is often preferable to waiting for creditors to wind-up the company through compulsory liquidation, over which the directors have little control.
Talk to us if there is the prospect of Insolvency and Personal Guarantees are involved
If your company is struggling to pay its debts and is facing insolvency, the sooner you talk to us the better, especially if a Personal Guarantee is involved. If the Personal Guarantee has been properly legally drafted, then the principal options are:
- Taking action to put things right before the Guarantee is called in;
- Come to a negotiated settlement in order to satisfy the Guarantee, or
- In the worst case go bankrupt.
As always, the sooner action is taken the more options are available. Please contact us or call any of our offices, below, for a FREE and NO OBLIGATION initial discussion on the ‘phone, through Teams or ZOOM or over a coffee about insolvency and Personal Guarantees.
Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley:
