Bankruptcy and Personal Guarantees
If a bank or financial lender has obtained your Personal Guarantee in support of a business loan they will look to enforce that guarantee against you if your company fails to make payment. Rather than simply commencing a monetary claim against the Personal Guarantor, it may be more cost effective for the lender to commence bankruptcy proceedings against the Guarantor.
Bankruptcy proceedings are only appropriate if the debt is admitted, or not capable of being disputed in any way. If the debt is greater than £750 a lender can issue a bankruptcy petition against the Personal Guarantor.
Procedurally, it is generally advisable for the lender to serve a statutory demand on the Personal Guarantor first. This is a formal demand which gives the Personal Guarantor 21 days to pay the debt demanded by the lender. If the Personal Guarantor fails to pay or reach a settlement with the lender within 21 days of service of the demand, then the Court will regard the Personal Guarantor as unable to pay his or her debts for the purposes of the bankruptcy proceedings. If made bankrupt, the assets of bankrupt's estate vests in the appointed Trustee in Bankruptcy who will administer the sale of assets to satisfy the financial demands made by the bankrupt’s creditors.
What constitutes a bankrupt's estate?
The bankrupt’s estate is made up of all the assets and property in which they have a beneficial interest at the date of the bankruptcy order. There is some allowance for the tools of the bankrupt’s trade, those assets necessary for the basic needs of the debtor and his family. Any assets to which the debtor has sole legal title. The beneficial interest of the bankrupt in his own sole or principal residence will vest in the debtor's Trustee in Bankruptcy. If the bankrupt is the sole owner, legal title to their principal residence will also pass to the trustee.
The family home is often the main asset of the bankrupt's estate. If a spouse or common law partner has a legal and beneficial interest in the property and refuses to sell the property, the Trustee in Bankruptcy will apply to the court for an order of sale. If the property is subsequently sold, only the bankrupt's proceeds of sale will vest with the Trustee in Bankruptcy.
What about the Personal Guarantee and my spouse?
Where a lender has obtained a Personal Guarantee for a business loan or line of credit and the Personal Guarantee is predominantly supported by the equity in their private residence, it is likely that any joint owner of the property - such as a spouse - will also be asked to sign a personal guarantee. Ordinarily with the request to sign a Personal Guarantee comes a request to obtain and confirm receipt of Independent Legal Advice. This will ensure that the lender has complied with the need to draw to the attention of the guarantors the onerous responsibilities that will result should they need to call upon the personal guarantees.
A spouse who does not have any legal interest in the family home may still have rights of occupation, known as ‘matrimonial home rights’, which will be assessed during the first year of the administration of the bankruptcy. A Trustee in Bankruptcy can still apply to the court for an order for the sale of the bankrupt’s family home. After a year has passed since the bankrupt’s estate became the technical property of the trustee, the Court will assume that the interest of the bankrupt’s creditors outweighs all other considerations.
The bankrupt has an obligation to cooperate at all times with their Trustee in Bankruptcy and whilst it is unlikely to be a happy relationship it will ensure that all of the Bankrupt’s creditors can no longer pursue them directly.
Business bankruptcy with a Personal Guarantee
Personal Guarantees are considered one of the biggest factors in the bankruptcy of company directors. Often the desire to grow the business faster or get to the next level of growth necessitates the need for bank or external funding and since the last recession it is highly common for lenders to insist on a Personal Guarantee.
How bankruptcies work
You can’t borrow more than £500 without telling the lender that you’re bankrupt
You can’t be the director of a limited company, and you can’t play a part in running a company without a court’s permission
You can’t buy a house under the ‘right to buy’ scheme
If you’re self-employed, you can’t use a business name which is different to the one you used before bankruptcy, unless you tell everyone you do business with about the bankruptcy
You’ll be barred from holding some jobs and most managerial positions
If you help another vulnerable person manage their property and affairs using a lasting power of attorney, this will be cancelled
You must cooperate with the official receiver. This includes handing over all documents and providing accurate information about your income, debts and assets
How long does bankruptcy stay on your file?
In most cases, bankruptcy restrictions will last until you’re officially discharged, likely to be 12 months after you are made bankrupt.
If the official receiver finds that your bankruptcy happened because you acted irresponsibly or dishonestly, they can extend the length of time that those restrictions apply. This is called a bankruptcy restriction undertaking and can last up to 15 years. This might happen if, for example, you committed fraud, tried to hide assets, or ran up debts through gambling or similar.
All things considered the onerous responsibilities associated with the signing of a personal guarantee can be devastating and very often the full extent of that responsibility isn’t obvious until the lender is seeking personal settlement of their outstanding monies. Whilst we understand that the raising of funds to support and grow your business may be essential establishing the terms on which those funds are lent is equally important. Where possible make sure that you understand how you will be asked to pay that loan if your business cannot. If you don’t like idea of losing all of the hard-earned assets you have accumulated at the very least you should consider the cost of insuring your personal guarantee in the same way as you’d insure the house that stands behind it.
If you'd like more information on how Personal Guarantee Insurance works, or if you'd like to speak to one of our advisors, please call 0208 004 7250.