Personal guarantees – Where do you stand and what do they mean to your finances?Posted: Jul 29, 2022

Personal guarantees can be a problem when a business becomes insolvent, and directors are often concerned about their liability. When businesses are in the start-up phase or looking to expand and grow, it isn’t uncommon for directors to sign off on a personal guarantee. While this may not be unusual it’s important to know what that could mean later.

Things to be wary of with personal guarantees and common problems

There are some issues around personal guarantees that regularly arise when a company becomes insolvent. It can all get very complex and of course, each case is different.

• They can resurface years later. Overdrafts and long terms loan guarantees can easily drop off the radar and surprise you if you have financial difficulties.
• If you resign as a director, or another director resigns, this does not usually invalidate the personal guarantee. Time will not change this, and neither will any other factors such as mismanagement or misconduct after you left the company.
• If you sell the company the personal guarantee will complicate matters. The bottom line is that you are probably still contractually liable for the guarantee even if the business is no longer yours. Unless the buyer and the lender agree to transfer the guarantee, which is unlikely, you will need to make some sort of provision in the sale to finalise the remaining loan
• If more than one director signs the guarantee, things can get emotionally and legally messy. The problem here is that percentage of the business you own in shares may not directly relate to the percentage amount you have guaranteed on the loan. So basically, even if you only own 10% of the company and the other directors own the rest, if they cannot pay, you could still be liable for most or even all (see the next point) of the guaranteed amount. They will want someone to pay up, so if you appear to be the most solvent person in the chain, they could come after you with more vigour than the other directors. It has been known for loan companies to pursue one director only in some cases. When the money is gone and the lenders come for the payment, it can be a big strain on friendships and family relationships. So be careful if you are going into a multi-person guarantee as it can have a lot of negative repercussions if things go wrong.
• Director’s personal guarantees are usually watertight and if you find yourself unable to pay the loan company it can lead to debt issues for you and your family and even bankruptcy. Even if, as in the point above, you find yourself in a position where you cannot pay a loan with multiple guarantors, or you have left the company, you will very likely still be liable. You will need to negotiate what that ‘liability’ means with the loan company but to be honest, the deal was that you would cover the loan, so it’s about how you will pay not if you need to pay most of the time. In some cases, there may have been a liability cap included in the loan agreement, but this is not usually the case.

While all the above are rather terrifying worst-case scenarios, they aren’t necessarily the most likely ones. The loan companies will want their money repaid, so they will usually at least try negotiating a solution that works for everyone. However, make no mistake, they will want to be repaid and you guaranteed that loan, so they will not stop pursuing the money they are owed.

Director's personal guarantee checklist

If you have one or more personal guarantees and you think you could be facing financial difficulties or insolvency, they run through the following list, so you know where you stand. It’s probably a good idea to grab a pen and paper to get all this down.

1. What guarantees are you responsible for and who is the lender?
2. Have you guaranteed any easily forgotten contracts such as leases?
3. Have you put a personal guarantee on any supplier agreements?
4. What percentage of the money owed are you potentially responsible for, remembering there is a difference between your share of the company and your share of the responsibility for the loan?
5. What are the remaining payment terms and amounts for any loans?
6. What is the total amount owed in all loans and commitments that carry your guarantee?
7. If your company becomes insolvent, roughly what value is there in the assets, stock and so on that could be offset against these debts?
8. What is the likely worse case effect on your personal financial situation if your business goes insolvent?

Personal guarantees can seem like a necessary evil or even an afterthought when you initially enter into the agreement. For many businesses, they are required so to ensure you have the money and cash flow you need to expand or start up your company. Just remember that they also can, and often do, have consequences that seem unlikely at the time.

Call us or book an appointment on our ‘am I liable’ information page, here if you are concerned you may be insolvent.