Directors’ Personal Guarantees in Insolvency

Directors' Personal Guarantee Solicitors

What is a director’s personal guarantee?

Often when creditors provide a loan to a company, they require additional protection in the form of a personal guarantee (PG) from the director(s). This means that if the company is unable to pay the loan back, the creditor can pursue the director(s) personally for this amount.

When can a director’s personal guarantee be called in?

When a company becomes insolvent, it will normally enter into an insolvency procedure. Whether the PG is called in depends on the insolvency procedure entered into. When the aim of the insolvency procedure is to realise assets for the creditors, PGs will usually be called in.

There are other circumstances in which a PG may be called in, for example where the company is in arrears on the debt or is not following the terms of the agreement.

The risk of creating a preference

When a director learns that the company may be insolvent, he/she should avoid directing the company to repay the loan which relates to their PG. This is because in doing so a director may be creating a preference by preferring to repay a loan that they are personally liable for. If this is the case, in a later insolvency procedure, the director will be held personally liable for this debt.