When a company becomes insolvent and enters liquidation, any personal guarantees signed by directors become enforceable by the lender. This means directors who provided these guarantees can be held personally liable for the company’s debt, and it is not the company’s debt.

What is a personal guarantee?

A personal guarantee is the granting of security between a company director and a third party, such as a lender, supplier, or landlord. The guarantee protects the third party, so if the company cannot repay their debt, the lender or supplier will be able to ask the director for the funds and so won’t lose out. Directors can use personal assets as security, as a means to get company funding. Personal guarantees can be required for the below forms of funding:

• Invoice finance.
• Business and property loans.
• Commercial rent repayments and lease agreements.
• Bank overdrafts.

Are personal guarantees protected by limited liability?

If a director has signed a personal guarantee and the company enters insolvency, the guarantee bypasses the company’s limited liability protection, making the director personally liable for the debt specified. If the director cannot afford to repay out of their own funds, they may have to sell their assets to cover the costs.

In normal circumstances, limited liability protection separates a limited company’s finances from the director’s personal funds. This means that company debt is classed as a separate entity to a director’s personal finances.

How we can help

If your company is struggling with debts that it cannot afford and you’re worried about how personal guarantees could impact you. Our initial advice team can provide you with free, impartial advice with no obligation, all tailored to your circumstances, and can help decide the best solution for your company.

• Repaying via a formal repayment arrangement
  One of the ways you can alleviate your debt is through repaying it through a Company Voluntary Arrangement (CVA). CVAs are formal repayment arrangements that consolidate your company’s unsecured debts into affordable, 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.
  More on Company Voluntary Arrangements (CVA)
• Pre-arranged sale of assets
  In some circumstances, a company can be sold via a pre-arranged sale of the business and its tangible assets to a third party, or associated company. This is a process known as a pre-pack administration. An Administrator is engaged to manage the sale process, ensuring that fair value is achieved for the business and assets. The process enables the directors to keep control of the company and continue trading until the appointment of the administrator, and the sale then completes shortly afterwards. This process helps to ensure minimal disruption to customers and often results in an enhanced return to creditors via a sale of assets such as goodwill.
  More on Pre-pack Administrations
• Restructuring through administration
  If more substantial restructuring is required to alleviate the company’s insolvency, the directors can explore administration. 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.
  More on administration
• Closing through a voluntary liquidation
  If the debts are substantial enough that saving the company isn’t feasible, the directors can close the company in a structured, orderly manner through a Creditors Voluntary Liquidation (CVL). Closing through this arrangement draws a line under the insolvent company, allows employees to claim redundancy pay, and gives the 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.
  More on Creditors Voluntary Liquidations (CVL)

In summary

Directors may sign personal guarantees to acquire finance or other assets to support their company. A personal guarantee may sometimes be limited to a certain amount of the debt and, occasionally, can be backed up by security over the director’s personal assets, such as their home. Since the guarantees are made against the director’s own assets, they bypass the company’s limited liability protection. If your company is struggling financially and you’re worried the creditors will try and call on any personal guarantees, speak to us, and we can work towards a solution that works for all parties.

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