17 February 2022: A personal guarantee is an agreement that holds a company’s director(s) personally liable if the business is unable to repay money owed. From a lender’s point of view, a personal guarantee makes a loan agreement more secure as the responsibility for paying it back falls not just on the company that borrows the money but also on the individual director(s) who provided the personal guarantee.
Typical areas where liabilities might be personally guaranteed are:-
- Bank loans and overdrafts
- Invoice discounting facilities
- The lease to the trading premises
- Finance leases on equipment and motor vehicles
- Supplier credit application forms
Everyone who signed the guarantee is liable and creditors can request repayment at any time upon default. This means that if you and another person signed the personal guarantee, you are both jointly responsible. If one party does not pay, the lender could force the other to repay the full value.
Many directors providing these guarantees typically assume that the lender/creditor would never have any cause to call on the guarantee in a manner that affects their personal assets. However, in the current economic climate, and with many business still suffering due to the effects of the Covid-19 pandemic and impacts of the lockdowns, we are likely to see many instances of personal guarantees being called on to satisfy company debts.
In difficult circumstances, this will inevitably lead to directors having to sell personal assets to satisfy debt and/or ultimately face being made bankrupt. Some lenders may agree to payment plans. Although these are usually in exceptional circumstances and will often involve large monthly sums. Directors ought to be aware that lenders are under no obligation to agree to a payment plan and they will also add additional costs and interest, so the longer you take to pay back the loan, the more you will repay.
If you have signed a personal guarantee that is called upon either when a business becomes insolvent or upon the liquidation of the company, the first thing you should do is seek professional advice. It can be the case that some personal guarantees can be invalid where the agreement has either not been drawn up correctly or has been incorrectly executed.
If you are concerned about a personal guarantee you have signed or if your company is struggling financially and you are worried about the effect a personal guarantee could have on you and your family, please contact one our helpful management team for a free initial consultation with no obligation. We will always assist where we can regardless of the outcome for us.