Personal guarantees are commonly demanded by banks and other lenders before they sanction business borrowing, and it’s not unusual for guarantees to be secured on a significant asset, such as a director’s home.
A serious problem can arise if the business experiences cash flow problems and enters insolvency, however. If there’s no option other than to liquidate the company, personal guarantees remain in place and can cause severe financial difficulty for the director personally.
A personal guarantee is an official commitment to a lender to repay an outstanding loan if the company cannot afford to pay. It lowers their perceived risk and encourages business lending, which in many cases is crucial for growth and development.
It’s sometimes possible to limit the level of personal liability when the personal guarantee is arranged, and often the case that financial problems seem unlikely when a loan is taken out. The problem is that if a business declines, the guarantee attached to a loan can create a serious situation for directors.
Liquidation means your company’s assets are sold for the benefit of creditors, and the business closes down. The personal guarantee remains in place, however, and is a significant issue for you and potentially other directors if they have co-signed.
If your company is to be liquidated you should carefully inspect the terms of the guarantee and seek professional guidance on the possible repercussions. UK Liquidators can offer you a free same-day consultation to assess your level of liability, and provide professional advice on how to proceed.
If you’ve provided a personal guarantee for a lender and your company is being liquidated, your creditor will demand repayment in full. It’s likely they’ll pursue you through the court if necessary, and there’s an ever-present threat of personal bankruptcy as a result.
The guarantee may be secured on an asset, such as your family home, in which case the lender will take steps to seize that asset. In this respect, they’re likely to seek a high court judgment, which allows them to take enforcement action.
The lender could issue a Charging Order through the court, which means they have specific legal rights over the property, and may even be able to enforce its sale.
It may be possible to negotiate your level of personal liability with the lender, or potentially arrange a payment plan to repay the outstanding amount, but this is by no means assured.
Personal guarantees are typically worded to avoid ambiguity or uncertainty over liability if the worst-case scenario materialised and a company can’t repay a loan. Lenders take great care to lower their risk and avoid any legal objection if a guarantee is called in.
This is why you need to seek professional guidance on how to proceed, as personal guarantees differ in their requirements and levels of liability. There may be flaws in the terms and conditions that render it partially or wholly unenforceable – changing the terms without advising you, for example.
UK Liquidators can help you if you’re liquidating a company with outstanding personal guarantees. We’re liquidation specialists and will provide reliable professional guidance on the best way forward.
Please contact one of our partner-led team to arrange a free same-day consultation. We operate an extensive network of offices around the UK, so you’re never far away from professional help.
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If you are considering liquidation for your company, taking expert advice at an early stage is crucial. At UK Liquidators, our team of licensed insolvency practitioners are committed to providing limited company directors with the help and advice they need to make an informed decision.
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