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What actions can a lender take if a personal guarantee is not satisfied?

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Updated: 9th February 2021

Understand what happens when a personal guarantee crystallizes 

Business borrowing typically involves one or more directors having to provide a personal guarantee. Taking on this form of personal liability can often be the only way for businesses to access the funding they need to grow.

The guarantee offers reassurance to the lender that they have recourse to deal with any default on the loan, but it does leave directors’ personal funds and assets at risk in the event of company liquidation.

So how do personal guarantees work in general terms, and what can a lender do to enforce a guarantee?

How do personal guarantees work?

A personal guarantee from a company director is essentially a formal assurance to repay outstanding borrowing if their business can’t afford to pay. Lenders typically secure a business loan on a personal asset, which can be the director’s home.

This doesn’t cause a problem when business is good, but if it declines and the company has to be liquidated, the lender will call in the guarantee and could take legal action to recover their money from the guarantor.

What can lenders do if a personal guarantee is not satisfied?

Lenders sometimes secure a legal charge over a director’s home if there’s sufficient equity, so if the company defaults they can recover their money by forcing a sale or remortgage of the property. 

Even without a legal charge on personal assets, however, if a director is unable to satisfy a personal guarantee on business borrowing, the lender can still take legal action against them.

This typically involves issuing a statutory demand for the outstanding loan amount due, and if this isn’t paid, bankruptcy proceedings may follow. In either situation, a director faces serious financial difficulty for being unable to satisfy the guarantee they’ve provided.

Not all lenders take this type of action immediately a personal guarantee is called in, so what other outcomes may be available in these circumstances?

What are the options when a personal guarantee cannot be satisfied?

Negotiate with the lender

Some lenders are open to negotiation of a personal guarantee if they have proof the director cannot afford the full amount due. They may be willing to agree a full and final settlement, for example, at a lower sum than was originally guaranteed.

Pay in instalments

Similarly, they may allow a director to repay the outstanding sum, or a proportion of it, in instalments. It’s highly advisable to seek specialist assistance before approaching a lender in this respect, however, as professional input offers a greater chance of success.

Personal Guarantee Insurance (PGI)

Some directors take out Personal Guarantee Insurance to cover a proportion of their liability should a guarantee be called in. This type of insurance cover is typically based on a fixed percentage of the guarantee provided, with a lower percentage being guaranteed in the first year, rising each year.

Obtaining licensed insolvency help

When a director’s personal wealth is at serious risk, it’s important to seek reliable advice. The involvement of a licensed insolvency practitioner (IP) instils greater confidence in a lender that the director’s finances would allow for payment in instalments, and the IP can act on a director’s behalf to secure the best deal possible.  

Real Business Rescue will provide the support you need if you cannot afford to satisfy a personal guarantee. Our partner-led team has extensive experience of negotiating with lenders, and can advise on the best options available.

We offer free same-day consultations, so we can quickly determine the best way forward. Please contact one of the team – we work from an extensive network of offices around the country, so you’re never far away from professional support.

Keith Tully

Partner

0800 644 6080
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