Call 0800 644 6080 (From Mobile 0333 009 0010)
Call 0800 644 6080 (From Mobile 0333 009 0010)

Directors Personal Guarantees

Licensed UK Insolvency Practitioners FREE Meeting for Company Directors We can help with serious company debts, HMRC and creditor pressure, VAT/PAYE/Tax arrears, cashflow problems and raising finance.

Directors' Personal Guarantees During Liquidation


There can be any number of reasons why a company director might be willing to provide personal guarantees in support of a business loan, property lease or line of credit.

Typically, the individual offering these guarantees will assume that the lender will never have any cause to call in their loans in a manner that affects their personal assets.

Unfortunately, this assumption can occasionally prove misguided where personal guarantees have been given and a business is facing significant financial pressures and cash flow concerns.

Therefore it’s very important for anyone offering personal guarantees on business loans to carefully consider the implications beforehand and to understand their options when creditors are looking to seize their assets as payments.

Here’s our look at some of the key issues around personal guarantees for company directors.

What is a personal guarantee? 

A personal guarantee is an agreement that means a business director takes a certain level of responsibility for his or her company’s debts in the event that they cannot be paid back by the business itself. Operators in any sector might consider a personal guarantee worth providing if it means they can access credit or business overdraft facilities or take on debts they are confident of managing comfortably.

From a lender’s perspective, a personal guarantee makes a loan deal more secure because responsibility for paying it back falls not just to the borrowing company but to the individual directors involved as well.
Why might a personal guarantee be arranged?

There are almost as many reasons for personal guarantees to be offered in support of a business finance arrangement as there are business finance arrangements. To a lesser or greater extent, the financers of small or medium-sized enterprises will want to know that they will not be left entirely out of pocket if a given company is unable to meet its financial obligations further down the line.

In effect, personal guarantees function as a means of providing reassurance to lenders or finance providers, while allowing businesses to access the funds they need to operate and pursue growth opportunities.

As such, personal guarantees can perform that function and open up the prospect of funding in each of the followings scenarios:

  • Business bank loan applications

  • Invoice finance arrangements

  • Property leases 
     
  • Trade supply deals 

  • Asset leasing agreements  

Arranging caps on liabilities

The details of a personal guarantee deal can, and often do, stipulate a cap on the extent of a director’s liabilities but this will always be far more difficult to negotiate into an agreement once a company is in a financially challenging or perilous position.

So, for directors, it is vital to consider and include a liabilities cap prior to signing a personal guarantee agreement with a lender.

Advantages and Disadvantages of a Personal Guarantee

The upsides to signing personal guarantees in any of the contexts explained above are clear enough in that they all offer potential routes to financing for SMEs or for companies of any size. However, it is important for individual directors not to overlook the potential downsides to signing personal guarantees under these circumstances.

From the perspective of directors, there ought to be careful consideration given to the fact that signing a personal guarantee can eventually lead to a situation in which your entire financial position is jeopardised. In fact, it’s important for directors to realise that what might seem like a hypothetical and highly unlikely scenario, of becoming personally liable for large and insurmountable debts, can all too quickly become a painful financial reality.

A key downside risk for directors giving personal guarantees to support business finance setups is that interest levels on large debts can soon mount up. And, where personal guarantees have been provided, directors can find themselves facing the prospect of having to sell a family home to satisfy creditors and the terms of an arrangement. Under these circumstances, bankruptcy can become a real possibility and lenders might still pursue individuals for payments long after they’ve stopped working as a director of a particular company.

What to consider before providing personal guarantees: 

Other options - Given the stakes involved, the first consideration you should make if you’re thinking about providing personal guarantees on a business finance facility is whether or not there are other options available. If you can raise the funds your company needs without personal guarantees then that will generally be a far more preferable option from your perspective as an individual.

Getting advice - To protect yourself as much as possible in the event that you do provide personal guarantees on behalf of your company, it always helps to take legal and personal financial advice around the issue. Some agreements leave directors more personally liable for business debts than others and even seemingly subtle differences in the details of a guarantee deal can be significant in the long run.

Demanding clarity – A lender will generally prefer to leave individual directors liable for their companies’ debts to as great an extent as possible but this isn’t always rightfully the case. Therefore it’s important for directors who have provided personal guarantees to demand clarity on the issue of exactly where their responsibilities begin and end.

Can personal guarantees be negotiated out of?

There is scope for a company director’s personal guarantees to be negotiated out of but the process can be difficult and cooperation on the part of lenders that are still owed money might well prove hard to come by. As with any negotiation process, clear communication is essential and you should make sure all key points of agreement, as well as your own intentions and expectations are detailed in writing wherever possible.

Don’t wait for a bank or any relevant creditor to outline where your personal responsibilities begin and end in connection with a company’s outstanding debts. If you are aiming to remove yourself from the equation in this kind of context you need to be proactive about it, give clear warning of your intentions and wait to be contradicted if disputes subsequently arise.

The importance of timing

It is very important for directors to be aware of where their personal guarantees remain in play with regard to a specific company and its finances. Lenders will tend to assume that such guarantees remain in place wherever and whenever they can so the onus is on individuals to clarify and get in writing their removal at certain relevant junctures.

The best time for a director to broach the subject of removing a personal guarantee is when the terms of an arrangement have been satisfied in full and where a debt has been paid back entirely. That’s the ideal but it is generally the case that your chances of negotiating out of a personal guarantee will be stronger the less indebted or precarious a situation your company finds itself.

Corporate insolvency and personal guarantees 

There is no disguising the negative potential of a situation whereby a director has given personal guarantees in order to secure a commercial loan or finance facility only to see the relevant business enter corporate insolvency.

Consequences could include a director’s property assets and personal savings being seized. Plus it might mean a family home and the assets owned jointly with close relatives being seized as well.

The extent to which an individual and his or her assets might be part of the corporate insolvency equation will depend on what kind of personal guarantees were given ahead of a borrowing deal being struck and signed; which again highlights the importance of understanding the risks involved and the potential outcomes ahead of entering a personally guaranteed business loan arrangement.

Co-signing personal guarantees  

Where there are co-guarantors on business loan, lease or overdraft, the respective capacities of each party to pay back monies owed will be scrutinised by creditors if the company enters insolvency. With the right kind of cooperation, all parties can agree a workable solution that avoids any prospect of personal bankruptcy but there is also scope for disagreements and for former colleagues to turn against one another during these sort of negotiations.

As ever, getting good advice from relevant and well-placed specialists in the field can make a big difference for the better from the perspective of individual directors facing up to corporate insolvency scenarios.

Insurance cover for personal guarantees on business loans 

There is no way of knowing for certain exactly how the next few years or the next decade might pan out for your company. Every director would like to imagine that progress will be positive and sustainable but financial problems can emerge from anywhere and with little or no warning. Therefore, there will always be a substantial risk in providing personal guarantees of any sort in the context of business financing and corporate loan arrangements.

Thankfully, there are now insurance policies available to directors who are weighing up their options and considering guaranteeing company loans on a personal basis.

By sticking to the terms of any policy that covers these situations, directors can avoid the worst of the potential pitfalls and strike a better balance of risk and reward as they look to generate the finance their company needs. Personal guarantee insurance protection can also help to establish a more even balance of liabilities among directors of a single company.

Getting advice on personal guarantee concerns 

If you are a company director and you’re worried about issues around personal guarantees you’ve given in support of a business finance arrangement of any kind, it’s crucial to get advice from experts in the field. Real Business Rescue has a network of offices right across the UK with teams of corporate finance and insolvency specialists delivering clear guidance and valuable support to directors during difficult moments.

Personal guarantees can become a source of real worry when a company’s financial position is such that creditors are calling in their debts and assets are being seized. For directors, having personal finances and assets become part of the corporate insolvency picture can be a nightmare scenario.

It’s important therefore to know that there are options available even when the prospects of a favourable resolution might seem remote.

However, problems relating to personal guarantees will not disappear on their own and dealing with them properly requires concerted effort, cooperation between relevant parties, well-informed advice and proactive steps to be taken on the part of directors.

Call Real Business Rescue today to speak directly to one of our insolvency specialist and business rescue experts. We can offer free and independent advice free of charge, by phone or at your place of work or one of our UK offices.

Feel free to send us an email or call us on 0800 644 6080 for a free confidential advice on liquidation or any other matter related to business insolvency and recovery. 

It is very good news that HMC Health & Beauty has been acquired as a going concern by a purchaser with a strong track record in the sector. Not only does it mean that the business will continue to trade, safeguarding the livelihoods of the staff, but it also puts it on a more secure footing for the future.
Read the Case Study   View all Case Studies

Contact our team

Jonathan Munnery
Andrew MacKenzie
Julie Palmer
Thomas Mckay
Keith Tully
Processing...
or find your nearest office

If You've Enjoyed This Article or Found it Interesting, 'Please Share it' With the Rest of the World!

Related News


What is a Seized Goods Letter?

Friday 2nd December, 2016 Written by Keith Tully

If your business goods have been seized by a government agency such as HMRC or Border Force, read our guide on seized goods letters for company directors.

Learn More…

Construction sector insolvencies: help and advice for firms in financial distress

Thursday 25th August, 2016 Written by Keith Tully

The construction industry remains in crisis this summer as the number of insolvencies continues at the highest level of all UK sectors.

Learn More…

Which UK industry sectors are experiencing the most insolvency appointments?

Thursday 25th August, 2016 Written by Keith Tully

Figures from the Insolvency Service show that in 2015 the construction industry suffered the highest number of insolvencies in England and Wales, with the wholesale and retail trade coming a close second.

Learn More…
Every day we help companies just like yours turn things around against seemingly impossible odds, regardless of your situation we can help. Find your nearest office today.
Menu