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Personal guarantees and the possible consequences on the guarantor if they are called upon

It is not unusual for lenders, landlords, finance companies and certain suppliers to ask for personal guarantees as it is a way for them to protect themselves if the company fails.

A personal guarantee means that the individual, such as a company director, is personally liable for the debt, not the company, even though the finance, loan, supplies and premises were used for the company.

Personal guarantees are especially common in the alternative finance market and peer-to-peer lending industry. There are some lenders, for example Funding Circle, who have lent small businesses approximately £2bn but the loans are usually backed by personal guarantees. Obviously, lenders want to see a degree of commitment from business owners.

It is common in the building trade for certain suppliers to request personal guarantees. It is important to read the terms and conditions of any credit agreement. You can always delete the reference to personal guarantees but you do run the chance that suppliers may not deal with you. You can restrict the amount of the liability and write on the agreement that you will not accept any liability over and above a certain figure, irrespective of anything written on the agreement. This may give you grounds later if the worst happens and the guarantee is called upon.

It is worth noting than if several directors have given a personal guarantee (or give a single guarantee jointly and severally) to the same lender, the lender does not have to take action against all of them but can claim the whole amount from one guarantor.

What happens if the company fails?

In the event of default, the personal guarantees will be called upon and the guarantor will be liable to pay the company's debt. If they do not do so, the beneficiary of the guarantee has several options available to them. The   next step does vary depending on the creditor and the amount owed but the options open are as follows:-

  • Commence court action and ultimately they could enforce a judgment debt against the guarantor.
  • Issue a statutory demand. This would allow the guarantor a period of 21 days to either settle the debt or reach an agreement to pay.
  • Once the statutory demand has expired and if the debt is unpaid and it is more than £5,000, the creditor could issue a bankruptcy petition.

If you have been asked to sign a personal guarantee, you should always seek independent legal advice before signing anything as the terms can vary (it is not uncommon for banks to request a legal charge over your home at the same time).

At the time that personal guarantees are given, it is never the intention that they will be called upon.  However, there may be unforeseen circumstances such as a recession, a significant bad debt which could result in the business failing and as a result the personal guarantee will be called upon.

Also, anyone providing personal guarantees does need to be mindful of the number of guarantees that they give. I recently dealt with an insolvent liquidation where the director had provided personal guarantees to two lenders, a finance company and a supplier. The liabilities amounted to in excess of £300k. As a result of the guarantees that the director had given, he had to sell his house in order to realise sufficient equity to satisfy the debts. This has left the director and his family having to share living accommodation with other family members whilst they find a much smaller house to move to.

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