Personal Guarantees – Did you take advice before signing?

Being a director of a limited company means a director is not liable for the company debt.  Well, that is the theory anyway.

All too often at PBC we advise directors who have given personal guarantees for company liabilities (“PG”).  Sometimes they do not realise what they have done until after we have suggested they check out the documentation, while on other occasions a PG has been given when their company was under duress and the directors were desperate for financial support.

Having said this, the key question is whether that PG is enforceable or even a PG at all; just signing a credit agreement on behalf of your company does not mean you have given a PG.

The best advice that can be given is, when confronted by a request for a PG, a director takes independent legal advice beforehand.  It maybe the directors have no choice but to give a PG, but there are areas of mitigation, such as a cap on liability, for example.

The presence of a PG may, at times, influence directors to act contrary to their duty owed to company creditors when insolvency is a significant possibility, as the fear of the PG being called against them is a genuine concern.

At PBC we see this conflict between PG exposure and directors duties regularly and advise directors on the correct way forward, including where possible facilitating a means of settling the PG exposure if, indeed, the worst were to happen.  

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.

Have you given a personal guarantee?

Have you given a personal guarantee

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.