Can I get out of a personal guarantee?

Many company directors sign personal guarantees to help them access the funds they need to grow their businesses. At the time, it might seem like a relatively straightforward decision. However, personal guarantees can become a significant source of stress and anxiety when the company gets into financial difficulty. 

If the company cannot repay its borrowing, lenders can be quick to call in a guarantee. In the worst-case scenario, that could lead to personal bankruptcy. However, although it’s rare, some directors have successfully challenged the validity of a guarantee and avoided some or all of their liability. 

What is a personal guarantee?

A personal guarantee is a contract one or more company directors sign agreeing to repay commercial financing if the business cannot afford to do so. By signing the personal guarantee, also known as a director’s guarantee, they become legally liable for some or all of the debt if the company fails. 

Creditors such as banks commonly request personal guarantees for business loans, property leases, invoice finance arrangements and asset lease agreements. The terms of every guarantee are different. For example, it may only apply for a set time period, your liability could be capped at a specific amount or the guarantee may be subject to other limitations.

It’s common for more than one company director to sign a guarantee. That usually makes you joint and severally liable. In those circumstances, the lender can make one or more of the directors responsible for paying the outstanding liability. It does not need to target the directors equally and will usually pursue the director with the most assets and resources.

Can I get out of a personal guarantee?

While it’s possible to get out of a personal guarantee, it is rare. Lenders are very careful about the contracts they write up and go to great lengths to ensure they’re watertight. In the vast majority of cases, that means personal guarantees are enforceable. 

If your company breaches the terms of a financial arrangement and triggers the lender to call in a guarantee, they will write to you setting out what you owe and requesting payment. If you cannot pay the liability, the lender can take legal action against you which could put your personal assets at risk. 

If your company is insolvent and you have signed a personal guarantee, you may try to resolve the situation any way you can. For example, you might sell company assets at a reduced price to raise money quickly or try to trade yourself out of trouble. However, both these options bring their own risks and could lead to financial and legal penalties.

What can make a personal guarantee unenforceable?

There are instances when you may have grounds to challenge the validity of a guarantee. For example:

• The guarantee is not in writing, it has not been signed by all the guarantors or you did not have the capacity to sign it  
• You were not given the full facts when signing the guarantee or were misled in some way about its terms or implications
• There’s a term in the guarantee that’s unfair
• The lending facility secured by the guarantee has changed significantly and you were not informed about those changes
• A condition in the contract has not been met or fulfilled
• The terms of the contract are ambiguous or unclear   

It’s common for lenders to request that all guarantors receive independent legal advice before signing a guarantee. If you receive legal advice, the guarantee becomes more difficult to challenge. 

How can I get out of a personal guarantee?

If you have signed a personal guarantee that a lender is calling in, you should seek professional advice immediately. There may be grounds to challenge the guarantee, but if not, it might be possible to negotiate a settlement. These are the routes to explore:

Make a legal challenge

If any of the examples we have provided above apply to your guarantee, you may be able to make a legal challenge. However, this is only a route you should take if you have genuine grounds to do so due to the costs involved. 

Negotiate a settlement

You may be able to negotiate a settlement with the lender. They may agree to give you more time to pay or accept a reduced payment amount rather than taking you to court.

Check for personal guarantee insurance 

There are insurance policies that provide some protection against claims on personal guarantees. However, if you’ve reached a point where your company is struggling financially or a lender is seeking to call a guarantee in, it will already be too late. 

Enter an Individual Voluntary Arrangement (IVA)

If you cannot afford to pay the liability, you could enter into a formal and legally binding debt agreement known as an IVA. It can protect your personal assets and spread your debt repayments over a typical period of five years. 

Will resigning or retiring get out of a personal guarantee?

A lender can still enforce the guarantee if you resign, retire or liquidate the company. If you want to resign or retire, you should take steps to deal with the guarantee first. 

You can ask the lender to release you from the guarantee. It is under no obligation to do so, but it may be willing if the company is in good financial health and has met its repayment obligations to date. Another approach is to request that a remaining or incoming director becomes the guarantor in your place.   

How can we help?

If you have signed a personal guarantee and are worried about your company’s financial position, please get in touch with our team of licensed Insolvency Practitioners for confidential and professional advice. We provide a free, same-day consultation to help you understand your options. You can also arrange a face-to-face meeting with one of our advisers in our network of offices throughout the UK.