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 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.
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.
Unfortunately, there is no easy route out of a PG. A director should seek legal advice as soon as they realise their company may be facing insolvency. The options available to the company upon its insolvency can be assessed by an insolvency specialist here at Farleys. If the company can avoid insolvency, then the PG may not become enforceable. This is why it is important to get advice early.
We will also be able to advise on whether the PG is valid. If it is, it is possible to approach the creditor and see they will accept a negotiated settlement. A creditor will only do so if it makes commercial sense to do so.
If you would like advice on the legal aspects and implications of personal guarantees, please get in touch with Farleys’ insolvency team on 0333 331 4224.Request A Call Back