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What Happens to Personal Guarantees in Insolvency?

Directors may have to sign personal guarantees to secure funding from lenders or parties supplying the company with assets. While they mainly exist as security in case the company finds itself unable to repay its debts, personal guarantees in insolvency can lead to further financial issues for directors, which could even involve their personal finances or assets.

What is a personal guarantee?

A personal guarantee is an act 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.

Where a personal guarantee might be required:

  • Invoice finance.
  • Business and property loans.
  • Commercial rent repayments and lease agreements.
  • Bank overdrafts.
Personal Guarantees in Insolvency

Personal guarantees in insolvency

A company becomes insolvent when it cannot repay its liabilities as they fall due. Should this happen, the directors should seek help from a licensed insolvency practitioner. If all, or a portion of the company’s debt is secured by a personal guarantee, the director(s) are liable to repay the debt.

Limited liability and personal guarantees in insolvency

In normal circumstances, limited liability protection separates a limited company’s finances from the director’s personal funds. This means if the company finds itself in debt, the director’s own savings won’t be affected.

More on personal liability and company debt

However, if the 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.

How we can help

If your company is struggling with debts that it cannot afford to repay, contact us. 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)
  • 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. Personal guarantees in insolvency can add another complication for directors. 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.

FAQs

Can I get out of a personal guarantee?

If you signed a personal guarantee, you can’t simply not pay it, though you may be able to renegotiate the terms of the agreement with the creditor. If the creditor calls on the personal guarantee, the director should pay it or try to come to a new agreement with them.

Make sure you understand the specific terms of the personal guarantee before signing, especially what can happen if you cannot repay it.

Can creditors pursue a director for a personal guarantee?

Once the company enters a formal insolvency arrangement, all pressure from the creditors themselves is suspended. The insolvency practitioner will act in the creditors’ best interests and ensure the funds, whether they’re from the company’s bank account, or generated from the sale of company assets, are distributed to the creditors.

An insolvency practitioner’s duties

Will the creditors bankrupt me?

While bankruptcy doesn’t apply to limited companies in the UK, if the director owes more than £5,000 that they cannot repay, whether they’re inside or outside of personal guarantees, the creditor can apply to make the director personally bankrupt.
Despite sounding scary, bankruptcy may be a feasible option if a director cannot repay the guaranteed amount. If the director’s circumstances allow it, they could also apply for a formal personal debt arrangement called an Individual Voluntary Arrangement (IVA), enabling them to repay their personal debts in affordable, monthly instalments.

IVAs and personal bankruptcy

Beverley Horton Christopher Callaghan Stephen Hall

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