Personal guarantees in insolvency

When your business is heading into insolvency, it can be a difficult and demanding enough time for you as director.  However, this can be magnified if your private assets are at risk because of one or more personal guarantees (PGs).  Here we outline some implications that different insolvency procedures: liquidation, administration and company voluntary arrangements can have on any personal guarantees that you’ve made.


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Personal guarantees in company voluntary arrangements (CVA)

When a business enters into a CVA, any personal guarantees that you’ve given still remain.  It will be at the discretion of creditors whether they will be called in.

For example, if the company is entering into a CVA prior to it defaulting on any payments, its creditors have agreed the terms of the CVA, and the company upholds those terms, it is very possible that the directors’ personal guarantee/s may not be called upon.  They will still exist, but the creditors have no reason to hold the director/s personally liable for the company’s debts, because they are comfortable they will receive payment.

If however, the company has defaulted on several payments and its creditors have lost patience, those who have PG/s may choose to hold the director/s personally liable, even though the company is entering into a CVA.  In such cases, it is up to the guarantor (or a licensed Insolvency Practitioner / professional specialist) to negotiate with the creditors as to exactly how that is repaid.

In the worst cases, a creditor may demand payment for the full amount, plus interest and charges, and threaten enforcement action against directors personally, even though the company is repaying under the CVA.  Between the guarantor and the company, the creditor would never receive more than the amount of the original debt, plus interest and charges, but a creditor can choose to hold the guarantor personally liable at the same time as the company repays the debt, to ensure that they get their money as soon as possible.  

When putting together CVA proposals, we therefore look to negotiate with your creditors at the earliest stage of your company’s financial difficulties to get the best deal we can for you.  There is no one size fits all solution to PGs in a CVA, but communication with your creditors is the key to getting the best fit for you and your company.

Personal guarantees in liquidation: creditors’ voluntary liquidation (CVL) and compulsory liquidation

When a company enters liquidation any PGs directors have made will crystallise or become payable.

In the case of CVLs, there are a couple of ways to approach this, depending on means and future plans:

  • If the plan is to set up a new company post-CVL, it may be possible for the new company to take on the old company’s debts and renegotiate new payment terms with the creditors.  However, in some cases we have found that creditors can be less likely to agree to this because they are most likely to want the debt settled sooner rather than later.  
  • If no new company is planned, an agreement will need to be made with the company’s creditors regarding what can be repaid.  In our experience, banks will be more willing to negotiate on this, whereas some suppliers will have less flexibility and will need repayment as fast as possible.  Some considerations:
    • If a director has funds available, or a property with a lot of equity in it, for example, they may well be expected to settle the full amount.
    • If they are unable to settle the full amount, but can make a sensible offer towards repayment of the debt, many creditors will be willing to settle for a one-off payment, or agree on a payment schedule rather than enter into costly legal proceedings.
    • In our experience, a creditor is most likely to consider a significant reduction in the overall amount repayable, if they are offered a one-off lump sum sooner rather than later.
    • If there are no means to repay the debt or offer a sensible repayment plan, directors may need to think about bankruptcy or an IVA.  We can advise on this. We have extensive experience putting IVAs in place for directors who have multiple PGs.

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A word of warning, if you know that your business is entering into insolvency proceedings, it is absolutely crucial that you do not pay off any creditors with whom you have outstanding personal guarantees before other creditors.  There is a legal order in which creditors must be dealt with in insolvency.  You mustn’t give preference to those with whom you have PGs.  If this occurs, you’ll become personally liable for repaying that amount back to the company to settle its debts with creditors in the correct order.

Personal guarantees in administration

When a company enters administration, a stay is put around all legal proceedings against the company preventing their progression, or any new action being brought against the company.  This does not however cover PGs.  Creditors can still and often will hold guarantors personally liable for the company’s debt when it enters administration.

The implications for directors’ personal guarantees may depend on the rescue plan for the company or the outcome of the administration process.  In the meantime however, you will need to make a deal with your creditor personally, which may or may not need to involve payment.

It could well be the case, for example, that a creditor may call in the PG, but not pursue you for payment until the outcome of the administration has been decided.  This is most likely to occur in the case of the banks.  They may call in the personal guarantee but will not pursue you for payment if, for example, they are happy to accept the terms of a proposed CVA.

Similarly, if the outcome is going to be liquidation and the bank is satisfied that there will be enough assets to settle the debt, often they will be happy to wait for payment until the cash is raised.

Smaller creditors however, may not have the luxury of being able to wait, and in such cases may need to pursue you for payment.  In these cases, you’ll need to make an agreement or your creditors will be entitled to apply to the courts for a judgment against you personally, which can be enforced if necessary.

If you do have to settle the company’s debts personally however, there is a point in law – ‘subrogation’ which enables you to stand in the place of, or ‘step in the shoes’ of, the creditor when the company’s assets are being used to settle its debts.  

This means that if the company is being liquidated and the creditor you were forced to pay personally was a secured creditor, you would be at the top end of the tree for repayments when the company’s assets are shared amongst its creditors.  If however, the creditor were an unsecured creditor, it would depend entirely on how much the company’s assets were worth against the amount of unsecured debt as to whether you were entitled to any repayment or not.

The same principle of subrogation can also be applied to CVAs so it’s possible that even if you are forced to settle some of the company’s debts personally, you may be able to claim that money back from the company as the situation is resolved.

It’s rarely simple, but there are always solutions!  Contact us and we can help you work through your situation to find the best solution for you and your company.

A final word – several and joint liability

Where one or more directors have entered into personal guarantees, it does not necessarily follow that each director will be held liable for an equal share of the debt.  Creditors will chase the most likely source of repayment, so if one director has a greater means than others, creditors are entirely within their rights to chase that director for repayment over any of the company’s other directors.

If you are at all concerned about this, or you would like some further advice, please contact one of our business rescue experts directly.