What happens to personal guarantees in insolvency?

Help for directors with personal guarantees

If your business is insolvent, you might be worried about the potential impact it can have on your own finances, particularly if you have signed a personal guarantee. It’s not uncommon for lenders, trade suppliers and other finance providers to ask you to provide a personal guarantee to secure credit. While you might be happy to sign a guarantee at the time, it can cause significant problems if your company is struggling financially and cannot pay what it owes. 

What is a personal guarantee?

A personal guarantee is a commitment to repay business borrowing using your own funds if the company cannot make the payments. That provides the lender with the reassurance that, even if your company fails, any losses will be covered. 

Personal guarantees can be beneficial as they reduce the risks for lenders and make it easier for growing businesses to access the funds they need. However, they can also create serious problems for company directors, who can find that their personal assets, including their homes, are at risk. 

What happens to a personal guarantee in insolvency?

Certain ‘default events’ are included in personal guarantee agreements that will trigger the lender to enforce the guarantee. One such event is when the company becomes insolvent. Missed payments will alert the creditor to the company’s financial position. The lender will then write to the director who signed the personal guarantee to request the repayment of the outstanding amount.  

If your company is insolvent, you might be tempted to pay certain debts, such as those secured by a personal guarantee, ahead of others. However, when a company is insolvent, you must act in the best interests of the company’s creditors as a whole and you cannot make preferential payments. If you do, you could face accusations of wrongful trading, which can bring its own personal liability issues.  

Importantly, a company does not have to be insolvent for a lender to call in a personal guarantee. If the company does not stick to the terms of the agreement or you are in arrears, that could be enough for the creditor to pursue you personally. 

How does a creditor enforce a personal guarantee?

The process for enforcing a personal guarantee differs depending on the creditor and the amount. The first step is usually for the creditor to write to you to request you to pay the debt. If you can’t pay in full or reach an acceptable repayment agreement, the creditor will typically pursue it through the courts using one of the following routes:

High Court Judgement

If the guarantee is secured against an asset such as your home, the creditor is likely to apply for a High Court Judgment, which will allow them to take enforcement action and seize the asset. If the guarantee is not secured against an asset, they could seek an Inhibition Order (a Charging Order in England and Wales) to secure the debt against your home. 

Statutory Demand

Another route is to issue you with a Statutory Demand, which gives you 21 days to pay the debt in full or reach a repayment agreement with the creditor. The creditor could begin sequestration (bankruptcy) proceedings against you if you ignore the demand or cannot pay it.

Can I get out of a personal guarantee?

You cannot simply get out of a personal guarantee. You may be able to renegotiate a personal guarantee when the business is financially stable, but not when the company is struggling or is already insolvent. 

When the personal guarantee is first called on, you should seek legal advice to make sure the agreement you have is valid. It could be that the guarantee has not been drawn up or executed correctly, in which case, it might not be legally enforceable. 

If it is legally valid, the cost and time associated with pursuing you through the courts means that creditors may be open to a negotiated settlement. They may also be willing to give you more time to pay what you owe if you can come up with an acceptable repayment schedule.

If you think your company is viable and could go on to be profitable despite its financial struggles, you could consider a Company Voluntary Arrangement. A CVA is a formal insolvency procedure that allows you to continue to trade and repay what you owe over a typical period of three to five years. Any personal guarantees will remain in place when you enter a CVA, but your creditor may decide not to call it in if it’s happy with the terms of the arrangement. 

Need advice?

Are you worried about the potential consequences of a personal guarantee? Then contact our team of business debt experts for a free, same-day consultation. They will help you explore emergency funding options and insolvency procedures such as a CVA, and guide you on the best route forward.