Directors’ Personal Guarantees in Insolvency

In this guide, we’ll explain what a personal guarantee is and look at the different scenarios when they’re typically required. We’ll also explore how personal guarantees are treated when entering insolvency procedures such as liquidation, administration and company voluntary arrangements (CVA).

What is A Director’s Personal Guarantee?

A personal guarantee is a legal document that, once signed by the director of a company, makes them personally responsible for repaying a company loan, overdraft or credit facility if the business cannot afford to do so. 

This type of security is used by business lenders, landlords and suppliers to reduce the risk that a loan will not be repaid. However, signing a personal guarantee can also benefit the business, as it allows it to access vital funding that may not otherwise be available. If all goes well, the company will repay the lender according to the terms of the credit agreement and the personal guarantee will never be called in. 

Personal guarantees are signed on a limited or unlimited basis. A limited personal guarantee is capped, so directors will only be made personally liable for a proportion of the company’s debt. In an unlimited personal guarantee, the director will be personally liable for 100% of the outstanding debt, including the lender’s legal fees. 

Every personal guarantee is different, so make sure you read the small print very carefully and understand what the potential consequences could be for you and your business before you sign.  

When Might A Director’s Personal Guarantee Be Required?

It’s only the directors/partners of private limited companies (LTD) and limited liability partnerships (LLP) that may be asked to sign a personal guarantee. Their personal finances and the finances of the business are legally separate, so if the company were to fail and no personal guarantee was in place, the lender would only have a claim on the company’s funds, which may not cover the full value of the debt. That’s why many lenders ask for a personal guarantee to be signed.  

Personal guarantees are commonly required for:

• Business loans
• Bank overdrafts
• Commercial rents
• Trade credit
• Property loans
• Invoice finance 
• Leasing agreements

The terms of personal guarantees vary considerably from lender to lender. Personal guarantees can be capped at a specific amount or limited in time. It’s also not uncommon for banks to take a legal charge over a company director’s home to support the personal guarantee, or to keep the personal guarantee on file even when the borrowing has been repaid.   

How Do I Get Out Of A Director’s Personal Guarantee?

Getting released from a director’s personal guarantee can be difficult. Some guarantees contain terms that limit your liability to a specific time or transaction, but it’s also common for directors’ guarantees to be ongoing and even apply when:

• You have resigned as a company director
• The company has stopped trading
• The company has been wound up

Some directors are shocked to be approached by creditors attempting to enforce a personal guarantee for the debts of a company they are no longer involved in. Potentially, you could even be held personally liable for company debts that are incurred by other people running the company long after you have left. 

There are a few routes you could potentially take to be released from a director’s personal guarantee:

1. Repay the debt in full 

The simplest way to be released from a personal guarantee is to repay the borrowing in full. This could be done either by refinancing without a personal guarantee or by settling the debt. Either way, you must make sure the lender will release you from the guarantee as this may not be automatic.

2. Ask to be released

Alternatively, you could ask the creditor to release you from the guarantee. This will only happen if you can convince the lender that the company is in such a strong financial position that there’s no risk of a default on the loan.

To do that, you will need to present:

• Complete financial statements for the last two or three years
• Realistic business projections for the next few years
• Plans to address any weaknesses in the business’s finances
• Proof of alternative security you could provide in place of the personal guarantee

If you plan to leave the company, you should write to your creditors and ask them to release you from the guarantee. You could suggest that they request a personal guarantee from the incoming director(s) in your place.

3. Get the guarantee set aside

If those methods are unsuccessful, you may be able to get the guarantee set aside if you can prove there was an element of misrepresentation or misleading conduct in the way it was obtained.

What Happens If You Default On A Personal Guarantee?

If you default on a personal guarantee i.e. you breach the terms of the finance agreement, the personal guarantee may be called in and you will receive a letter from the lender. It will detail their payment terms and ask you to make the payment within a certain timeframe. If you do not make the payment, the lender can either begin legal proceedings against you to recover the debt or it can petition for your bankruptcy. 

If you provided a personal asset in support of the guarantee, such as a family home, the lender will typically attempt to obtain a high court judgement against you. That will allow it to seize and sell the asset to recover the debt. Alternatively, the creditor may obtain a charging order, which will give the lender rights over the asset you used as collateral. The lender can then apply to the court for another order to force you to sell your home. 

What Happens To Directors’ Personal Guarantees In Insolvency?

Can Directors Get Out Of A Personal Guarantee if the Business Is Insolvent? The answer is usually no, these contracts are designed to be legally binding by the financial providers who insist upon them.

There are specific instances where a guarantee can be contested but this requires the services of a specialist personal guarantee litigation lawyer.

NB: A company does not have to be insolvent or liquidated for a personal guarantee to be called in. If a company is in arrears, not following the terms and conditions of the agreement or has a county court judgement (CCJ) registered against it, that could be enough for the personal guarantee to be enforced.  

Directors’ Personal Guarantees In Liquidation

When a company enters liquidation, any personal guarantees the directors have signed will become payable. In the case of a company voluntary liquidation, an agreement will have to be made between the lender and the director(s) about what can be paid. For example:

• If a director has the funds available or has a property with sufficient equity, they may be expected to settle the amount in full.
• If the director cannot settle the full amount, a sensible one-off lump sum or a payment schedule might be acceptable to the lender rather than entering into costly legal proceedings.
• If the director does not have the personal funds or assets to make a sensible settlement offer, they may be left with little choice but to consider an individual voluntary arrangement (IVA) or enter into bankruptcy.   

Directors’ Personal Guarantees In A Company Voluntary Arrangement (CVA)

When a business enters into a CVA, any personal guarantees will remain. It will be up to the specific creditors to decide whether to call them in. If the company has not defaulted on the loan and the creditors agree to the terms of the CVA, the lenders might choose to leave the personal guarantee in place and not enforce it.  

However, if several payments have been missed before the company enters a CVA and the creditor has lost confidence in its ability to pay, the lender may decide to call the personal guarantee in. In that case, it will be up to the guarantor or the insolvency practitioner administering the CVA to negotiate with the company’s creditors to determine how the debt will be repaid.

Directors’ Personal Guarantees In Administration

When a company goes into administration, a ‘moratorium’ or legal stay is put in place. That prevents legal action from being taken or progressing against the company for eight weeks. However, it does not prevent the enforcement of directors’ personal guarantees. Creditors can still make directors personally liable for company debts when the business enters administration. How this affects the directors will depend on the outcome of the administration process.

The creditor might decide not to enforce the personal guarantee until the outcome of the administration is decided. If the outcome of the administration is a CVA and the lender is satisfied that the debt will be settled, they may be happy to wait for repayment.

Alternatively, it may be that the lender cannot afford to wait for the outcome of the administration process. In that case, the company director will have to agree on a repayment arrangement with the creditor. If that cannot be done successfully, the creditor can apply to the courts for a judgement to be made to enforce the personal guarantee.

The Risk Of Creating A Preference

If you suspect that your company is insolvent or is entering into insolvency proceedings, under no circumstances should you try to repay creditors with outstanding personal guarantees. There is a set legal order that the debts of creditors must be settled in. Go against that by favouring certain creditors, known as creating a ‘preference’, and you will be personally liable to repay the amount to the company so its debts can be settled in the correct order.

Several And Joint Liability For Directors’ Personal Guarantees

If more than one company director has signed a personal guarantee, it does not necessarily follow that those directors will be personally liable for an equal proportion of the debt. The lender will typically pursue the director who offers the greatest chance of repayment. If one director has more personal assets or funds than the others, creditors are within their rights to take action against that director alone. That will leave the directors to fight among themselves to make sure the debt is apportioned fairly.

Need Advice?

Have you signed a director’s personal guarantee and you’re concerned that your business could be insolvent? You must act now. Please call 0800 24 24 51 or email info@businessexpert.co.uk for free and confidential advice.