What directors need to know

Since the credit crunch and great recession of the late 2000s, they have become commonplace for most forms of business borrowing, finance and loans. 

It’s not just banks that require them either. Many Landlords, trade suppliers and even consumer facing companies that provide products and services like smartphones now require a personal guarantee signed as part of any agreement to secure their repayments. 

When business is running smoothly and companies can keep up with debt repayments then this isn’t a problem but the past two years have been anything but smooth for reasons we’re all familiar with. 

Should you be worried if your CBILS loan has a personal guarantee attached?

A personal guarantee can sometimes be likened to a ticking time bomb at the heart of a company’s finances – especially if they hit a rough patch and have to choose which repayments they’re going to make each month. This is when it can go off.

It can be even more problematic for directors because the personal guarantee is attached to one of them and their finances directly. 

If the company becomes insolvent and is eventually liquidated, the personal guarantee would still be active and they would have to fund the repayment themselves. 

There are generally three options available to a director or business owner if a creditor activates or is about to call in their personal guarantee:

  • Pay off the debt – while in most cases this might not be possible but if a business has resources to pay the debt in full, creditors will be more likely to accept this than go through a reclamation process. They might also be willing to agree to an alternative payment schedule rather than pursue the personal guarantee so it is always worth investigating. 
  • Pay off the debt personally – if the company can’t pay then if you have the means you could choose to pay off the debt using your own resources. You could also look to agree an alternative payment schedule yourself rather than the business if this would be advantageous and feasible
  • Get specialist advice – not being able to service a debt with a personal guarantee attached is usually a symptom of a bigger problem for the business and should be given immediate attention before it becomes unmanageable.

HMRC clarify approach on bounce back loan debt & CBILS including personal guarantees

An elegant one-two combination

One proven method to solve the problem of a personal guarantee hanging over a business is to use a combination of insolvency procedures. 

If a company has unsurmountable debt including an outstanding loan which has a personal guarantee attached to it given by one of the firm’s directors, the other directors might previously assume that this would prevent them from going into insolvency cleanly and efficiently.

A combination approach would solve this. 

In this example, the distressed business would propose a company voluntary arrangement (CVA) to its creditors which would see a proportion of debt (not including the personal guarantee) written off in return for the remaining debt to be paid in more manageable regular monthly installments.

The director in question would then enter an individual voluntary arrangement (IVA) themselves which would see a proportion of the personal guarantee written off, along with any other incurred debts including overdrawn directors personal loan accounts, in return for a regular repayment.  

This method protects the director from personal bankruptcy, CCJs and other negative outcomes and also allows the company to restructure its debt and remerge stronger when the CVA comes to an end. 

The creditors benefit from receiving two dividends – one from the CVA and another from the IVA – so will be more liable to accept a realistic proposal.

A final important point to reinforce is that if a business or individual is about to enter an insolvency procedure they should not make any payments to creditors they have a personal guarantee with before any other creditors. 

There is a formal legal order in which creditors must be paid and if some are paid out of order then this is known as a preferential payment. 

If this occurs then the director could become personally liable for repaying the amount back to the company in order to settle debts in the proper order. 

Five words can be used to separate any struggling business from a profitable one. 

They are “If it wasn’t for that…”. 

No matter what “that” is, whether it’s a small or large obstacle, in the best case it’s impeding a business from moving forward and fulfilling its potential. 

In the worst case it might be stopping a business from entering an insolvency procedure and restructuring itself to give it a decent chance at becoming viable once again. 

No matter what your company’s “that” is – we’re sure we can help

We offer a free, initial consultation for business owners and directors to discuss their situation and what immediate steps they can take to improve it. 

Even if a business has outstanding bounce back loan debt, CBILS or other problem debt it can’t get on top of – we’ll be able to work through a solution that could be acceptable to creditors. 

This lets directors get on with reestablishing the business once again.