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Do lenders call in personal guarantees?

Posted by Pete Faulkner on Jun 15, 2018 8:17:05 PM

What is a Directors' Personal Guarantee?

Director’s personal guarantees are a measure of security used by lenders to protect themselves when providing business finance. When directors seek funding for their business and sign a ‘personal guarantee’, it is a legally binding waiver that bypasses the limited liability status of a limited company during debt recovery. What this means is that should the business default on the finance terms, the personal guarantee will entitle the lender to recover any amount owing from the directors’ personal estate.

Why do lenders require directors to sign personal guarantees?

When seeking funding for a business, many lenders require the company director to sign a personal guarantee as a form of security. Since the limited company structure is designed to keep the directors’ personal finances separate from those of the business via the limited liability status, the signing of a personal guarantee overrides this protection and so should not be taken lightly.

Following the default of a finance agreement (and usually following insolvency), the personal guarantee grants the lender the right to seek any recovery of any unpaid debt due from the company from the guarantor’s personal estate.

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Do lenders enforce Personal Guarantees?

Simply put, yes. Personal guarantees are legal enforceable documents – the standard practice would be for a creditor to take the debtor to court, with the intention of requesting them to enforce a judgement debt against the debtor’s personal assets.

For any business to remain competitive is important that they manage their debtors. Lenders are no different.  If a business defaults on a finance agreement, lenders use personal guarantees to enforce debt repayment.

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What happens to a directors’ Personal Guarantee in Insolvency?

Personal guarantees are a form of security for the creditors and are written so that the company does not have to liquidate to be ‘called in’. For a loan and or a personal guarantee to be called in the company may only be in arrears or may have had a CCJ against the company or may simply not have followed the finance terms & conditions. 

It is also common for the business finance to be ‘unsecured’. For the finance to be unsecured the lender will have no debenture in the form of a fixed or floating change over the business or its assets. This means that when a company is liquidated the lender will be at the end of a long queue. Therefore, it is common for the debt due to the lender of an unsecured loan to remain unpaid following the liquidation of a company’s assets. The debt will then become the liability of the director who has signed a personal guarantee.

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The lender will demand payment of the debt, that is why the lender made the finance subject to the signing of a personal guarantee. The lender will call in the guarantee and follow whatever course of action is required.

Is this avoidable?

It is possible for a director to transfer some of the risk of the personal guarantee they have signed by taking out a Personal Guarantee Insurance policy. This may be taken out when the guarantee is first signed or at any period thereafter.

Personal Guarantee Insurance is tailored to the individual needs of the director. A single policy may cover one or more directors and one or more guarantee.

Before a director signs a personal guarantee they should seek the advice of a solicitor and also assess the benefits of Personal Guarantee Insurance against the risk they are considering.

If, at a later date, a director’s business enters into difficulty it may then be too late to take out any Personal Guarantee Insurance cover because the insurer will assess the financial status of the business at time of application.

A Personal Guarantee Insurance quotation can be arranged simply in a matter minutes by applying on line or calling one of our specialist UK based underwriters direct.

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Topics: #personalguarantee, #personalguaranteeinsurance, #commercial finance

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