When things get personal
17 October 2018: A director does not generally have personal liability for the debts of a company. However, at BRI we are seeing that, increasingly, directors hoping to save a company from the brink, will frequently put their own assets on the line, in order for the company to receive a much needed injection of funds. Lenders will commonly seek a personal guarantee from directors, where the company has limited assets of its own, against which lending can be secured.
In the event that the company finds itself in an insolvency process, or is otherwise unable to service the debt, the lender will turn to the guarantor director for payment and this can have dramatic effect on the director’s personal affairs, as well as any joint owners of assets (usually a spouse) and in extreme cases, can lead to bankruptcy.
Unfortunately a common theme during our free initial consultation meetings with directors is that they are either oblivious or do not fully appreciate what they agreed to when signing the guarantee document. Directors beware, as more finance providers and suppliers are looking at ways to safeguard their financial position.
The Milton Keynes office is currently assisting a former director and his spouse whose personal guarantees, totalling in excess of £1m, are now being called upon, following the liquidation of his company. The guarantees are from both finance providers and trade suppliers. It is worth noting that many trade suppliers, particularly in, but not limited to, the construction industry are seeking personal guarantees from directors as a matter of course, as part of the initial credit application process.
The guarantee makes the director jointly and severally liable for the debts of the Company. There is often no requirement to disclose details of specific assets owned by the director. Usually, all that is required is disclosure of involvement in the failure of a previous company or bankruptcy. This straightforward process can make the potential consequences appear less onerous than they actually are. Worse still, the director could be oblivious to the fact that he’s even given a personal guarantee.
In the event that you or a client are facing such a situation, it’s important to consider some key points, summarised below.
- Is the guarantee document valid? Legal advice regarding the enforceability of the debt is crucial.
- Is the guarantee unlimited or for a specified sum? You should understand the full extent of the liability.
- Is a spouse party to the guarantee and is their guarantee valid? If legal advice was not insisted upon by the lender, the document could be challenged.
- Assuming a valid guarantee is proven, early action is key. Will the lender entertain negotiations to settle the debt for a reduced sum? If so, consider what can reasonably be afforded and make an offer.
The list above is not exhaustive and there are a host of considerations to be made depending on the individual circumstances of each case.
If you think you could be affected by a personal guarantee, please speak to any one of our experienced management team for confidential advice with no obligation.