First things first:
A personal guarantee is a written contract or deed, signed by one or several guarantors, to agree that if the company is unable to meet the terms of a loan or credit agreement, the guarantors can be held personally liable for repayment of the debt (plus any interest and charges, and irrespective of that person’s ongoing relationship to the company).
Every personal guarantee (PG) is different, so it is always our advice that you:
- Seek independent legal advice before undertaking any personal guarantees (this is often a mandatory requirement of some PGs, for example, bank guarantees)
- Fully understand the implications for your personal assets should the guarantee be enforced
- Be realistic about your business’ chances of success and what you are willing to risk if it is not successful.
It sounds obvious, but where possible try to negotiate the best, or most narrow terms you can. It’s easier to do this when you a make a PG than it is to try and change the terms of a PG. If the day of reckoning ever comes, you may have dramatically reduced your personal risk!
Items that are usually open to negotiation are…
- A limit to the amount of the guarantee
- The timeframe of the guarantee – specifically, whether it relates to one loan, or all future lending
- Or attaching the guarantee to particular asset
Secured and unsecured personal guarantees
In general, most personal guarantees are unsecured, but others can be secured against particular assets or funds. Unsecured guarantees can put any of your personal or private assets at risk, whereas guarantees secured against particular assets only relate to those assets.
When can a personal guarantee be called upon?
If a company defaults on a creditor’s payment terms, the creditor may then send a statutory demand for payment, which is payable within 21 days. If the company can’t make payment within that time, or fails to agree an alternative payment schedule with the creditor, the creditor will be entitled to issue bankruptcy proceedings.
What to do when a creditor calls upon a personal guarantee
If you suspect one or more creditors is likely to call upon a personal guarantee, you must act quickly. Realistically, you have just a handful of options:
- Settle the debt: if the company has the resource to settle the debt, talk to your creditor before it reaches crisis point. Most creditors want cash or payment in a straightforward manner rather than starting the process of taking charge of personal assets. See if the company can agree an alternative payment schedule.
- Settle the debt personally: if the company is unable to settle the debt, you may choose to settle the debt personally, or negotiate terms to settle the debt personally. If necessary, use this to buy yourself some time whilst you consider the best way forward for you and the company.
- Confront the larger problem: if the company is unable to settle the debt, you need to deal with this larger problem. Is your business viable? If the company has a viable future, but needs some attention in the immediate term, a CVA or administration may be an appropriate solution. Alternatively, if it is no longer viable, liquidation may more suitable. The best way to protect your personal liabilities will be to address the company’s longer-term problems.
If your company enters into formal insolvency procedures, it depends upon the type of insolvency procedure, and in some cases the discretion of the creditor whether your PG will become payable. Read our page Personal Guarantees in insolvency for more information. However, depending on which is the most suitable approach for your business, we can help you find a manageable long-term solution or strategy to deal with both your personal and business finances.
Getting out of a personal guarantee.
In honesty, it can be very difficult to simply ‘get-out’ of a personal guarantee.
If you suspect that the business is heading into insolvency, the best advice is to seek advice quickly before any personal guarantees are called upon. A licensed Insolvency Practitioner will be able to work with you to assess the state of your business and your personal liabilities to find the best way forward for you and the business.
If your company is able to repay the money it owes in full, this is the ideal time to try and remove or terminate a personal guarantee. This must be done in writing.
If you are leaving the company, it may be possible to replace yourself on the personal guarantee with an incoming director, or depending on the debt and the company’s financial position, to remove yourself from the guarantee altogether. This is something that you need to discuss and arrange directly with the lender, and make sure that it is confirmed in writing.
‘Writing-off’ a personal guarantee
If you search the internet, there are quite a lot of websites suggesting that PGs may be unenforceable if their validity is questionable. You will come across businesses offering to ‘write-off’ your PGs.
To save you time and hopefully avoid accelerating any formal enforcement processes, in our experience the vast majority of bank, finance lease, or hire purchase PGs will be valid. It is always wise to have a solicitor look over a PG to confirm, but in our experience, looking to challenge or question a PG on such grounds is likely to be a significant waste of time (and potentially money) at a point when both are most critical.
There are reputable firms whose specialism is negotiating with creditors for clients who have one or more personal guarantees.
Need more information?
Have a look at other pages:
Alternatively, if you would prefer to talk this through with one of our business rescue experts, don’t hesitate to get in touch.