Understanding directors' personal guarantees
Directors’ personal guarantees (‘PGs’) are commonly requested to cover company bank loans and overdrafts, leases to business premises, asset finance agreements and builder’s merchants accounts amongst others and it is not unusual for a PG to be secured over a director’s home.
In some cases, offering a personal guarantee might be the only way in which a business can secure the funding it requires at a competitive interest rate.
Our favoured advice here is to simply not take a PG at all. However, we appreciate that needs must and depending upon circumstances,it may be that a PG cannot be entirely avoided. If you do take a PG try to ensure it is capped in terms of a maximum limit and period so you are not effectively signing over a blank cheque.
What is a directors' personal guarantee?
A PG is a formal agreement that makes the director of a company personally liable for any company borrowing which will get called if the company is unable to repay the money owed. This could cause serious problems to that individual if the business experiences trading difficulties and enters into a formal insolvency process.
Although providing a PG offers an added layer of protection for a bank or a finance providers, it can become very distressing for an individual or individuals if the business falls on hard times and the PG is called on.
Your may also be asked to sign a cross (group) guarantee. This is a variation of a PG designed to spread the creditor’s risk and avoid dilution of monies/assets transferred between group companies. A group (cross) guarantee ensures that the creditor can claim against any of the companies within a group (usually the company with the most assets).
Cross (group) guarantees are usually taken alongside a debenture in each group company. If a PG is given over a lease, then this will cover arrears of rent and future rent for the remaining term of the lease and any dilapidation claims at the end.
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Understanding the risk of directors' personal guarantees
If a company is able to meet the repayment terms for the duration of the loan agreement any personal guarantee will never be called upon. However, should the business face financial pressures and cashflow constraints or if a company enters into a formal insolvency process a creditor with a PG will demand repayment in full and if necessary could pursue you through the Court to recover the debt owed. Before signing a PG you should:
- Think carefully before giving a PG to a creditor without a debenture.
- If the future of your business in in doubt avoid running up additional debt with creditors with personal guarantees. A director that has personally guaranteed a debt may consider continuing to trade on an insolvent business in order to avoid the PG being called upon. However, this would risk personal liability for breach of duty or a wrongful trading claim and if the company does enter a formal insolvency procedure down the line.
- If you trade on recklessly director’s disqualification could also apply too.
How McTear Williams & Wood can help
It is possible to obtain Personal Guarantee Insurance to cover new or existing PGs. Cover can be obtained for multiple PGs or to cover multiple directors where the PG has been signed jointly by two or more parties. Though we do not provided such cover we can assist with putting you in touch with the right people.
We are also able to assist with negotiations on behalf of directors once the company has entered a formal insolvency procedure to reduce the debt and/or agree upon more reasonable payment terms. If you have any concerns please get in touch.
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