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Understanding your personal liabilities in relation to company debt

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As a Company Director, circumstances may arise where you find yourself in a position to offer a personal guarantee to support a line of credit. This may seem like a decision worth taking to enable your company to move forward and reach its true potential; however this does not come without risk. In a situation where a company is unable to maintain its debts and is in a position of financial distress, a personal guarantee can often become a cause for concern for directors, and in the current climate, where the viability of businesses is a major worry, offering a personal guarantee has an increased risk.

What is a Personal Guarantee?

A personal guarantee is a promise made by an individual to personally pay back any amounts owing to a Lender should a company not be in a position to pay back the amounts borrowed. A personal guarantee provides a lender with extra security should a company default on its obligations.

There are a range of scenarios in which a credit provider may ask a Director to provide a personal guarantee. Some of the most common include:

  • Business Loans
  • Invoice Financing Agreements
  • Mortgages
  • Leases
  • Hire Purchase and Operating Lease Arrangements
  • Trade Supplier Accounts

What benefits are there to signing a personal guarantee?

Securing credit

The most obvious benefit of providing a personal guarantee by a director is that it will improve a company’s chances of securing credit. Providing a personal guarantee may open up new lines of credit or may mean that a company is able to access a higher amount of funding.

New businesses

If you have recently started a new business you will have no recent trading history and may encounter difficulty in obtaining funding; this may be through obtaining loans and other facilities, or include opening Trade Supplier Accounts. By providing a personal guarantee, this may help you to secure credit for your company.

Risk vs. reward

The benefits of providing a personal guarantee do not however come without some risk. Should your company default on payments of credit, or become in a position where it will be unable to pay creditors back, you will become personally liable.

Without a valid personal guarantee, creditors are unable to pursue directors personally for amounts owed.

For some directors whose companies are in financial difficulty this may lead to long-lasting financial problems on a personal level, jeopardising personal assets and plans for the future.

Considerations

Before providing a personal guarantee, careful consideration must be given to ensure that you are comfortable with all of the terms of the guarantee. You should always ensure that you obtain appropriate legal advice to establish this.

Key considerations include:

  • Are there any caps on the personal liability or not? What amount will you be liable for should your company default and when are interest and charges applied?
  • What constitutes as a default; how and when are your creditors entitled to enforce guarantees provided?
  • Will notice be served on you prior to pursuing a personal guarantee or can creditors demand immediate payment?
  • Do future variations affect personal guarantees given; can a credit provider vary terms without consultation?
  • How are your net assets assessed; are you in a position to provide a guarantee and is this position likely to change?

Are you aware of all guarantees given?

You should ensure that you are aware of all personal guarantees that you have given and how these may affect you personally. You should take steps to establish the impact by:

  • Obtaining and reviewing copies of terms and conditions for all loans, mortgages and overdraft facilities undertaken.
  • Locate all hire purchase and operating lease documentation, review the terms and conditions and establish if any personal guarantees have been given.
  • Ensure you have copies of all trade supplier account opening application forms and review the small print and terms and conditions to establish if any personal guarantees have been provided.
  • Monitor your company’s finances and establish the full personal liability you may be subject to.

Establish your own personal position by undertaking a review of your own assets and liabilities.

New funding in the current climate

You may be looking to obtain new funding in order to support your business during the current pandemic. This may be through a Coronavirus Business Interruption Loan Scheme (“CBILS”) loan or Bounce Back Loan. Key points relating to personal guarantees are:

  • For Bounce Back Loans, personal guarantees cannot be taken to support lending under the scheme.
  • For CBILS facilities under £250,000, personal guarantees cannot be taken to support lending under the Scheme.
  • For CBILS facilities above £250,000, personal guarantees may still be required, however the amount which can be recovered under these guarantees is capped at a maximum of 20% of the outstanding balance of the CBILS facility after taking into account any other recoveries from business assets

In Summary

Giving a personal guarantee may help you to secure new finance for your company however this does not come without some risk.

You should always obtain independent legal advice prior to undertaking a personal guarantee.

If you are concerned about your position in regards to personal guarantees undertaken and what this means for the future, seek advice early.


For more information, please get in touch with Daryl on 07752 3579615 or email us at covid19help@armstrongwatson.co.uk.

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