Tips for avoiding difficulties with personal guarantees
One of the most frequent enquiries we get at the moment is from company directors worried about bank Personal Guarantees they have signed. A Personal Guarantee is generally given by a director as security for money borrowed by a company in which they are also a shareholder. If down the line the business is unable to repay the bank it then looks to the director personally under the guarantee.
The bank usually limits the Personal Guarantee to a fixed amount but in reality the eventual amount owed can be double after interest and costs have been added.
For a director the consequences can be dramatic –involving, for example, selling the family home in order to pay back the bank and/or bankruptcy.
In the rush to set up a new business or get a project underway business owners might be forgiven for taking a casual approach to Personal Guarantees. This checklist of 12 things to consider when taking on a Personal Guarantee liability and how to handle things if the guarantee is called in is invaluable reading for business owners.
Personal Guarantee Tips
Before giving a personal guarantee
- Explore other options you might have that would allow the business to borrow money without you being personally liable. Will the bank accept alternative security?
- When you give a personal guarantee the bank will often ask for a charge against your house to secure repayment. Think carefully whether you are prepared to put your family home at risk before agreeing to this.
- Take legal advice to ensure you fully understand the implications and consequences of giving a personal guarantee. Never just sign a personal guarantee.
- If you can avoid giving a guarantee, do so, because it can have severe implications for your personal finances (including bankruptcy) if the company can’t repay.
- Where your landlord is asking for a personal guarantee it is usually best to offer a rent deposit instead.
- A personal guarantee is usually a continuing security, which means that there is no termination date unless you are prepared to pay the bank the full outstanding balance of the loan.
- If you have to give a personal guarantee, cap your liability to an amount you can afford but always remember that interest and costs can be added to the fixed amount.
- Check whether you have already signed a personal guarantee with the bank as they are cumulative. This means that if you sign a guarantee with a limit (say of £10,000) and the bank asks you to sign a new guarantee (perhaps because the business needs to increase its loan) with an increased limit (say £20,000) then unless the bank expressly releases you from the first guarantee in writing, your liability will now be £30,000 not £20,000.
- If you have any personal savings with the bank these are in danger if the lender calls in the debt.
- Consider that if any co-directors have also given the bank a personal guarantee this does not mean that you repay the bank in equal proportions. The bank will go against the director who they believe has the most assets.
Discharging a personal guarantee
- The only sure way to bring your liability under a personal guarantee to an end is either to ask the bank to release you in writing (don't hold your breath) or to find the provision in the guarantee document allowing you to terminate on notice. This will cap your liability under the personal guarantee to the amount owed by the company at that time. You should only do this where the company no longer requires the facility or you cease to be a director/shareholder as inevitably the bank will want the money back. Tactically, notice should be served when the business owes the bank as little as possible or preferably nothing at all.
- Lastly, only ever sign a personal guarantee if you are comfortable with the risks.
Tactics to use if a personal guarantee is called in
If the worst happens and the personal guarantee is called in by the bank when your business doesn’t have the funds to repay it, for example if you go into administration, you should take early advice and carefully consider the options available to you as the implications of the bank taking legal action can be severe.
You may firstly want to examine whether the guarantee is likely to be enforceable by the bank. For example, is it backed by a charge on your house; was independent legal advice given and can the original signed document be located by the bank?
The next stage is to look at your ability to repay the money. If the bank has a charge your house or believes there are other assets sufficient to repay the full amount then the room for negotiation of a lower figure in full and final settlement is more difficult, but not impossible. If you have little means to repay then the bank will take this into account during negotiations.
If you discharge the guarantee in full and there were co-guarantors, you may be able to recover from them their share of the total guarantee. The same applies if you pay the bank more than your share. But the opposite is also possible, so if the bank goes after one of the other co-guarantors, that co-guarantor may come after you.
As always, tactics and timing are crucial for any director who ends up in this unfortunate predicament.
The Cousins Business Law Personal Guarantee Review can help in these circumstances. For a fixed fee of £95 + VAT, one of our experienced business solicitors will provide you with practical telephone advice on the best options available for minimising the amount you personally have to pay back. With our help clients have been able to secure big discounts and prevent their home from being sold to repay the debt.
If you are worried about a personal guarantee you have given a bank, landlord or other creditor call Nigel Musgrove on 01285 847 001 or email Nigel to take advantage of our Fixed Fee Personal Guarantee Review.
Personal guarantee review service launched
Article updated 23rd August 2012
Article added: 27 January 2011 © Cousins Business Law
This article is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.
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