Perhaps an obvious question but, how many times do directors respond with something like, “I am not sure,” or “No, I do not think so.”  Alternatively, a director will say they have given a personal guarantee, only to discover all they have done is signed a credit agreement as director on behalf of the company.

When a company enters an insolvency event, whether that is a restructuring procedure or liquidation, a company creditor who holds an enforceable personal guarantee may ignore the insolvency process and pursue the guarantor.  This could result in the personal insolvency of the guarantor, which in turn, has an adverse impact on the company where a restructure or turnaround scenario is intended.  In a recent instruction, 80% of the company liability was subject to personal guarantees, resulting in the director having to consider his personal position in addition to the possible restructuring of the company.

Sometimes personal guarantees are a requirement for company borrowings or certain supplies contracts.  Every director should be afforded the right to obtain independent legal advice before signing a personal guarantee and should take that advice.  If possible, you should also ensure there is a cap on any potential exposure you could face.  You may even consider insurance in case the guarantee crystallises.

Apart from the obvious financial burden on a guarantor, personal guarantees may lead to directors acting in breach of their duties.  As a company begins to struggle, it will be a natural instinct to pay that creditor in preference to others or, in some cases, avoid the guarantee liability from crystallising by continuing to trade when, perhaps, you should have ceased trading.  This self-protection mindset may conflict with your duties under the Companies Act and expose a director to potential compensatory awards for malpractice.

At PBC we always consider “The person behind the limited company” and will discuss options where a personal guarantee could have an impact on the way forward.  In our opinion, unless the guarantee can be managed, you have a director whose train of thought is not necessarily focussed on their statutory duties.

If you need any advice or assistance on any corporate restructuring or insolvency-related issue, then please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01908 033150 (Milton Keynes), 01234 989150 (Bedford) or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.