Director’s Personal Guarantee – What Happens In Insolvency?
The following article outlines what a Director Personal Guarantee involves and the impact this makes.
What is a Director’s Personal Guarantee and when is it required?
A director’s personal guarantee is a legally binding contract between a lender and director wishing to apply for credit for their business.
A personal guarantee will usually be requested by a lender – whether a traditional high street lender or a specific asset-based lender.
Circumstances that will lead to the requirement for a personal guarantee from a lender will be if the lender believes that the assets of a business may be of an insufficient level to settle a Company’s full liability to that lender in the event of default, usually because of insolvency.
For example, on applying for a bank loan, the bank will assess the financial viability of the Company and determine that the Company’s assets may not be at a level to cover the overall amount of the loan, they will then request that a director’s personal guarantee be provided.
There are no limitations to a personal guarantee. It will be a commercial decision between both parties to determine the level of the personal guarantee to be put in place.
What are the advantages & disadvantages of a personal guarantee?
The main advantage of the personal guarantee – providing it is agreed by both parties – are that funds will be lent to the business for working capital purposes to assist with its operational activities and thus the continuation of the business.
The disadvantage is that in the circumstance of default of the repayment of the loan by the Company, the director must personally repay monies to the lender from his own assets.
This is a personal guarantee, and a director cannot hide behind his or her directorship of that Company. It becomes a personal liability not a corporate liability.
In certain circumstances a personal guarantee might be supplemented with a charge (by the lender) on personal assets such as private residences or other personal assets.
What happens to a director’s personal guarantee in insolvency, e.g. administration or liquidation?
As part of the terms of a personal guarantee document, there will be certain default events by which the personal guarantee could be called upon by the lender.
First amongst these, but not limited to, is if the director’s company enters insolvency. This would be classified as a ‘determining event.’
In these circumstances, upon learning of the Company’s insolvency, the lender would write to the director confirming that they had been made aware of the Company’s insolvency and that they were now calling upon the terms of the personal guarantee as set out in the terms & conditions of the official personal guarantee document.
In most personal guarantees the outstanding amount at the time of the determining event will be immediately repayable in full.
Can you negotiate your way out of a personal guarantee?
In the instance of the company defaulting by entering insolvency, the lender will write to the director(s)to confirm notification of the insolvency and to demand the outstanding amount be paid to the lender subject to any limitations that the personal guarantee might contain.
A personal guarantee is generally not subject to negotiation however this will be a matter to be determined between the parties subject to the guarantee.
Why might a personal guarantee be arranged?
As stated above, a personal guarantee would be arranged in circumstances whereby a lender believes that the Company alone will be unable to repay the loan in full in the event of default/insolvency.
Who can sign a personal guarantee?
A personal guarantee can be signed by any officer of the company who the lender deems is a suitable guarantor for the purposes of the guarantee.
Can directors get out of a personal guarantee if the business becomes insolvent?
No. The driving purpose of the personal guarantee is for a lender to recover its outstanding liability in the event of default, usually as a result of the Company to which it has lent money becoming insolvent.
How can personal guarantees affect a director’s duties?
Signing a personal guarantee does not affect the duties of a director on a day-to-day basis. All the fiduciary duties of a director remain the same both prior to the signing of the guarantee and after.
In this regard the signing of the personal guarantee does not affect the director’s ongoing duties. There is still the expectation that the director will run the business to the best of his/her ability for the benefit of all stakeholders of the Company.
Are personal guarantees enforceable?
Yes. If a director signs a personal guarantee, they must expect that the debt will be recovered in full by the lender.
What is co-signing a personal guarantee?
A lender may request more than one guarantor in relation to the personal guarantee (if the Company has more than one Director), however, this does not occur automatically.
There is no upper limit to the number of co-signatories. Generally, these guarantors will be joint and severally liable for the outstanding debt until the debt is repaid in full to the lender.
What is personal guarantee insurance?
Personal guarantee insurance is an annual insurance policy that provides directors with cover in the event the business lender calls on their personal guarantee following insolvency.
Does having a personal guarantee affect your credit rating?
Before you become a guarantor, the lender will carry out a credit check on you.
However, this is normally a “soft credit score” and such credit searches are not available to other companies, so it does not affect your credit score.
If you are experiencing financial difficulty, you can be supported through this difficult process by experts who understand the pressures you are facing and have experience in working swiftly to deliver a strategy to resolve the issues you face. This is undertaken by seeking prompt advice from an Insolvency Practitioner.
Chamberlain & co offers a free initial one-hour consultation which is discrete and can be held via telephone, face-to-face meeting, or through a digital medium such as Microsoft Teams. All matters are discussed confidentially, and the team is used to making discrete enquiries on a no-name basis when working with you to produce a strategy to resolve your issues.
As with all insolvency practitioners, Chamberlain & Co are committed to delivering best advice in all scenarios, and the team’s work has been recognised regularly at the Yorkshire Accountancy Awards and Turnaround, Rescue and Insolvency Awards.
You can contact us by calling 0113 242 0808; or by emailing us at advice@chamberlain-co.co.uk or by completing our online contact form here.