Navigating the often complex field of personal guarantees by directors can feel like stepping into uncharted waters. As the core of your business, you will be expected to shoulder significant responsibilities. The buck will stop with you to weather any potential storms, and you must attempt to do whatever you can to navigate to calmer seas. However, personal guarantees can, if agreed to in the wrong circumstances, leave you in a very tough situation.
The stress you can expect to be under if your business is dangling on the edge of financial oblivion and your assets are at risk should it topple. This very possible reality is why it’s critical that you do your research, in order to better understand the complexities of this legal system.
If you’re seeking clarity on getting to grips with personal guarantees by directors, you’re in the right place. Join us as we unravel these intricacies.
What are Director Personal Guarantees?
Director personal guarantees are legally binding agreements made by directors of a company. These agreements state that, should the company face severe financial issues, the director will personally take responsibility for any obligations outstanding. Guarantees usually come when a company is seeking a loan or credit, and lenders want additional security against potential non-payment.
Being the director of a business is one of the most rewarding jobs a person can have. However, it can also be one of the most complex and stressful. This is why it’s vital that you carefully consider the implications of providing a personal guarantee, as it will involve assuming an additional, sometimes significant, level of financial risk.
Without proper legal advice and a thorough understanding of the concept, director personal guarantees can quickly leave you in hot water.
What are the Different Types of Personal Guarantee?
There are two commonly used types of personal guarantee, limited and unlimited. These two differ on the extent of financial liability a director will be expected to assume should the company be unable to fulfil its financial commitments. Limited guarantees place a cap on the amount or circumstances a director is liable for, whereas unlimited guarantees will not.
It is important that you understand the subtle differences between an unlimited and limited guarantee. Selecting between the two requires a careful assessment of the risks involved. In order to fully grasp the gravity of the situation, directors will often seek legal advice before entering into any such agreement. Here’s a closer look at each to get a better understanding of why:
Limited Personal Guarantee
If a director has agreed to a limited personal guarantee, their potential liability would be capped or restricted to only a specific amount or circumstance.
This would mean that were a situation to become so bad that the director is liable, they would only be required to pay the agreed amount.
A limited personal guarantee provides a layer of security for the director and their personal assets — ensuring that if the situation were to get particularly bad, the director would be less in danger of losing everything.
Unlimited Personal Guarantee
In an unlimited personal guarantee, the director will be expected to assume full and unrestricted personal liability for their company’s debts.
This would mean that, were the business to owe £50,000, the director would be personally responsible for the entire sum. Naturally, this type of guarantee exposes the director’s personal assets (home, car savings, etc.) to much more danger should things go wrong.
How to Get Out of a Personal Guarantee
Has a personal guarantee you can’t afford been called in? Getting out of, or making a personal guarantee unenforceable, can be difficult. However, though it will likely require extensive negotiation and careful examination of the terms and conditions of the agreement, it is, by no means, impossible.
If you’re thinking about how to get out of a personal guarantee, there are some tips you need to know, including:
- Negotiate: It is important that you engage in open communication with your lender as soon as possible to explore what options you may have to modify or get out of the personal guarantee.
- Offer Replacement: It may be possible to propose an alternative guarantor in your place, or offer additional collateral that could reduce the lender’s need to rely on the guarantee.
- Check Terms: If the lender said or wrote anything that misrepresented the situation to induce you to sign a guarantee, you could get out of the situation.
- Duty of Good Faith: If you sign an agreement with the belief that your guarantee is limited in any way, but the bank is aware of both your ignorance and the reality of the guarantee, then the bank may be void of ‘duty of good faith’. This would render the personal guarantee unenforceable.
- Timing: A personal guarantee will become unenforceable five years after first becoming enforceable. It’s important to note that this is not five years after signing the agreement, but from when the bank is able to enforce it. This date could be open to dispute.
- Business Restructuring: You may wish to consider the possibility of restructuring the business. This could improve its financial standing, and make the personal guarantee less of a risk.
Ins and Outs of a Personal Guarantee When Bankrupt
When a director faces bankruptcy, the intricacies and complexities of the already challenging elements of personal guarantees become even more critical. This additional difficulty will have a lingering impact on the dynamic for both the director and the lender. Here are some insights into the ins and outs of a personal guarantee when bankrupt:
- Automatic Stay: Bankruptcy will trigger an automatic stay. This prevents creditors, including personal guarantees, from taking any legal action to attempt to recover debts while the bankruptcy process is ongoing.
- Discharge Of Debts: In the UK, if a person is declared bankrupt, they will typically be discharged from their unsecured debts after a specified period (generally one year).
- Release: Bankruptcy can release an individual from their personal liability agreement.
- Credit Score: Filing for bankruptcy will have a significant and often long-lasting impact on your credit score. A record of bankruptcy will be included in your credit report, seriously impacting your credit-worthiness for around six years.
If you are facing the calling in of a personal guarantee when bankrupt, it is imperative that you seek expert advice as soon as possible from a specialist insolvency practitioner. An expert will be able to provide some much-needed guidance on personal guarantees by directors when bankrupt, as well as any other support you may need.
A Professional Foundation For When You Need It Most: Inquesta
The day-to-day landscape of a business can change and evolve drastically. If your company is beginning to struggle financially, the importance of expert guidance cannot be overstated, particularly when you factor the intricate details of personal guarantees into the situation.
As we’ve delved deeper into the nuances of personal guarantees by directors, it’s likely become evident that partnering with a seasoned professional is often not simply advisable — it’s imperative if you want to come out the other side safe and secure.
At Inquesta we take great pride in utilising our insolvency expertise to help people from diverse backgrounds and industries, supporting them with a variety of different insolvency needs — and personal guarantees are no exception.
We have an excellent track record, highlighting our commitment to guiding directors through the complex maze of serious financial challenges and helping make sure they avoid any and all hurdles they are confronted by.
With a wealth of experience in our team, we understand the pressures faced by company directors, and can offer bespoke, tailored solutions to help safeguard your corporate and personal assets.
When it comes to something as complex and potentially life-changing as personal guarantees by directors, choosing the right partner for support is crucial. At Inquesta, we are perfectly placed to help you towards financial resilience and peace of mind. Contact us today to find out more about how we can help you.