When  a director takes out a loan on behalf of a company, the lender may ask them to provide a personal guarantee. This is a written agreement in which the individual assumes personal liability for the debt in the instance that the company becomes insolvent and is unable to repay the loan. By signing a personal guarantee, the director will not be protected by limited liability meaning that the protection normally given to directors of private  limited companies is taken away. Instead, the director will be required to repay the debt from their own personal funds if the company is unable to do so. Personal guarantees provide an extra layer of security for lenders by giving them the right to chase directors for outstanding debts, if the company is unable to repay the money that is owed to them in full. 

There are a variety of different instances in which a personal guarantee might be used. These include, but are not limited to:

  • Unsecured business loans
  • Invoice finance
  • Property loans
  • Lease agreements
  • Bank overdrafts
  • Supplier credit agreements

How Are Personal Guarantees Enforced?

Following the liquidation of the company’s assets, if a lender who holds a personal guarantee has not been paid in full, the guarantee will be enforced. This may involve one of two routes:

  • Statutory Demand:  Generally, the first step that a creditor will take is to issue a statutory demand. This gives the director 21 days to either settle the debt or reach an agreement to pay. If an agreement is not reached, the creditor may choose to begin bankruptcy proceedings, if the debt is over £5000. 
  • County Court/High Court Judgement: Another option that  creditors may choose is to issue a court judgement. If the director is unable to pay then the creditor can apply for  writ of execution that allows bailiffs to seize personal goods.

Can A Personal Guarantee Be Overturned?

It is incredibly difficult to prevent a personal guarantee from being enforced. The only occasion in which a personal guarantee may be overturned is if the guarantee is deemed invalid, however this is very difficult to prove. You can take out personal guarantee insurance, however the best way to protect your personal funds when you’ve taken out a personal guarantee is to protect the financial stability of your company as far as possible, and to act at the first signs of instability. The more stable the financial position of the company, the more scope directors will have to negotiate with lenders and to reduce their personal liability. That’s why it’s essential to seek the advice of a licensed insolvency practitioner at the first signs of financial distress. Equally, in the event that your personal guarantee does get called in, your first step should be to seek professional advice. An insolvency practitioner will be able to confirm the validity of the personal guarantee, and advise you on the best steps for proceeding. 

If you are worried about a personal guarantee, don’t hesitate to get in touch with our experienced team at Ballard Business Recovery who will be able to assist you further.