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One of the main benefits of operating through a limited company is that its debts generally belong to the company rather than its directors. However, that protection can be reduced where a director has signed a personal guarantee.
Personal guarantees are commonly requested by banks, finance providers, landlords, trade suppliers and equipment leasing companies. If the company later becomes insolvent, the director may understandably be concerned about whether the guarantee will be enforced and whether their home or other personal assets could be at risk.
The important starting point is that placing a company into liquidation does not normally cancel a personal guarantee. The guarantee is a separate contractual commitment between the guarantor and the creditor. Whether it will be enforced, and for how much, will depend on the wording of the document, the amount owed, any security provided and the creditor's approach.
Molly Monks F.I.P.A of Parker Walsh, a licensed Insolvency Practitioner, regularly advises directors whose companies are facing liquidation and who are concerned about personal guarantees.
A personal guarantee is a legally binding agreement under which an individual agrees to repay a company debt if the company does not meet its obligations.
Although the company remains the primary borrower, the guarantee gives the creditor an additional route of recovery. If the company cannot pay, the creditor may be entitled to pursue the guarantor personally.
A guarantee can be unsecured, secured against a particular personal asset, limited to a fixed amount, or drafted as an "all monies" guarantee covering a wider range of liabilities. Where several people have signed a joint and several guarantee, the creditor may be able to pursue any one of them for the full guaranteed amount rather than dividing the debt equally between them. (GOV.UK)
Liquidation does not itself create the personal liability. The liability arises from the guarantee that was signed.
However, insolvency, missed payments, termination of a finance agreement or the appointment of a liquidator will commonly be treated as an event of default under the relevant agreement. This may allow the creditor to demand payment from the guarantor.
The creditor does not necessarily have to wait until the liquidation has finished or until it knows exactly how much it will recover from the company. Much will depend on the wording of the guarantee and the underlying finance agreement.
Some creditors issue a formal demand shortly after becoming aware that a liquidation is proposed. Others may wait for information from the liquidator, particularly where the company owns assets that could produce a meaningful return.
The fact that a creditor has not contacted the director immediately should not be taken to mean that the guarantee has been released.
A personal guarantee is normally enforced by the creditor that holds it, rather than by the company's liquidator.
The liquidator's role is to collect the company's assets, investigate its affairs and distribute available funds in accordance with insolvency law. Company liquidation deals with the company's liabilities, but it does not usually determine or remove a director's separate obligations under a personal guarantee. (GOV.UK)
The creditor may submit a claim in the liquidation for the company debt and separately consider its rights against the guarantor. Any money ultimately recovered from the company should be taken into account when calculating the remaining balance, as the creditor cannot recover more than the total amount properly due.
The amount payable will depend on the terms of the guarantee.
Some guarantees are capped at a specific figure. For example, a director may have guaranteed company borrowing up to £25,000. Other guarantees cover the full outstanding balance and may also include contractual interest, default charges and legal or recovery costs.
An "all monies" guarantee may extend beyond one particular loan and cover other liabilities owed by the company to the same lender. Continuing guarantees can also remain in place when facilities are renewed or replaced, depending on how the documents have been drafted.
It is therefore important not to rely solely on your recollection of what was agreed. A copy of the signed guarantee, the original agreement, subsequent variations and the latest statement of account should be reviewed.
The creditor should also be asked to provide a clear calculation showing how the amount demanded has been reached.
Your home is not automatically taken simply because the company enters liquidation or a personal guarantee has been called upon.
The level of risk will depend partly on whether the guarantee was secured or unsecured. A secured guarantee may be supported by a legal charge over a property, giving the creditor direct security for the debt. An unsecured guarantee does not initially give the creditor an interest in the guarantor's home.
However, an unsecured creditor may bring a court claim. If it obtains a judgment that remains unpaid, it may apply for enforcement action. This can include a charging order over property owned by the guarantor.
A charging order secures the judgment debt against the property. It does not automatically require the property to be sold, although the creditor may subsequently seek an order for sale in appropriate circumstances. Existing mortgages and earlier registered charges will generally rank ahead of a later charging order. (GOV.UK)
The position can be more complicated where the property is jointly owned, has little or no equity, is already heavily secured or is the guarantor's family home. Early legal advice should be obtained before agreeing to any voluntary charge or responding to court proceedings.
Where a guaranteed debt cannot be paid or resolved, a creditor may consider bankruptcy proceedings against the guarantor.
In England and Wales, a creditor's bankruptcy petition generally requires an unsecured debt of at least £5,000 and the other statutory conditions must also be met. A creditor may serve a statutory demand and, if it is not paid, secured or successfully challenged within the relevant period, use this as evidence that the individual cannot pay the debt. (Legislation.gov.uk)
Bankruptcy is not an automatic consequence of every personal guarantee. Creditors will often consider the amount involved, the guarantor's income, available assets, existing security and whether a payment arrangement or settlement would produce a better outcome.
Nevertheless, statutory demands and court papers should never be ignored. There are strict deadlines for applying to set aside a statutory demand or responding to a claim.
It may be possible to negotiate after a guarantee has been called upon.
Depending on the circumstances, the creditor may consider an affordable repayment arrangement, a temporary pause, refinancing, a discounted lump-sum settlement or another form of security. The creditor is not required to accept a proposal, but early and realistic communication will usually place the guarantor in a better position than ignoring correspondence.
Before making an offer, the director should understand the amount legally due, the value of their assets, their household income and expenditure, and whether they have other personal liabilities.
A settlement should be recorded in writing and should state clearly whether payment will release the guarantor from all further liability. Making a payment without obtaining clear settlement terms may simply reduce the balance while leaving the remainder enforceable.
Where several directors have provided guarantees, the documents must be checked to determine whether liability is several, joint, or joint and several.
A joint and several guarantee may allow the creditor to pursue one guarantor for the entire outstanding amount, even if that person expected the debt to be shared equally between all directors. The creditor may decide to pursue the person it considers most likely to have sufficient income or assets. (GOV.UK)
A guarantor who pays more than their share may have a potential contribution claim against the other guarantors. However, recovering that money may be difficult if the other individuals have limited assets or are themselves insolvent.
Disputes between directors do not usually prevent the creditor from exercising its rights under the guarantee.
Resigning as a director does not normally cancel a personal guarantee that has already been given.
The guarantee is a separate contract and may continue until the creditor formally releases it. Even where a director leaves the company or sells their shares, they may remain liable for company borrowing covered by the guarantee.
A former director should obtain written confirmation from the creditor if a guarantee is to be released. An informal understanding with the remaining directors, or an agreement that another person will take responsibility for the debt, will not necessarily bind the creditor.
This issue should be addressed as part of any company sale, shareholder departure or restructuring rather than being left until the company encounters financial difficulty.
Lenders were not permitted to require personal guarantees for loans made under the Bounce Back Loan Scheme. A director of a limited company will not therefore normally be personally liable for a Bounce Back Loan merely because the company cannot repay it and enters liquidation. (British Business Bank)
The government guarantee protected the lender rather than transferring the company's contractual liability to the director.
However, the absence of a personal guarantee does not prevent a liquidator from reviewing how a Bounce Back Loan was obtained and used. Separate issues may arise where funds were taken for personal purposes, transferred without a proper company benefit, obtained using inaccurate information or used when there was no reasonable prospect of repayment.
A Bounce Back Loan should therefore be disclosed fully to the proposed liquidator, together with the application, bank statements and records showing how the money was spent.
Directors should be very cautious about using the company's remaining money to repay a debt that they have personally guaranteed.
Paying the debt may reduce or remove the director's personal exposure while leaving less money available for the company's other creditors. The payment may subsequently be reviewed by the liquidator as a potential preference.
Under section 239 of the Insolvency Act 1986, a transaction may be challenged where it places a creditor, surety or guarantor in a better position than they would otherwise have been in if the company entered insolvent liquidation, provided the other legal requirements are satisfied. (Legislation.gov.uk)
This does not mean that every payment to a guaranteed creditor will automatically be recoverable. The company's financial position, the reason for the payment, its timing and the director's intentions will all be relevant.
However, a director should not repay a guaranteed bank loan, finance agreement, landlord or supplier simply to protect their personal position without first obtaining advice.
A signed personal guarantee should not be assumed to be unenforceable simply because the company has failed or the director did not fully appreciate the consequences.
However, guarantees are legal documents and their enforceability can depend on how they were drafted, signed and subsequently varied. Issues may arise regarding the scope of the guarantee, execution as a deed, misrepresentation, undue influence, changes to the underlying borrowing, compliance with agreed conditions or whether the creditor has calculated the debt correctly.
A guarantee may also contain a separate indemnity, which can give the creditor additional rights and make some traditional guarantee defences more difficult to rely upon.
These are specialist legal issues. A director who believes a guarantee may be invalid should obtain advice from a solicitor experienced in banking, finance or commercial disputes before admitting liability or making payment.
Delaying liquidation does not normally make a valid personal guarantee disappear. In some cases, delay can increase the amount owed as interest, arrears and charges continue to accumulate.
The company's insolvency position and the director's personal guarantee exposure should be considered separately but at the same time. A Creditors' Voluntary Liquidation may still be the correct course for the company even though the director will need a separate strategy for dealing with guaranteed debts.
Directors should also remember that continuing to trade an insolvent company solely in the hope of avoiding a personal guarantee could worsen the position for creditors and increase the risk of further losses.
The best approach is usually to identify every guarantee at an early stage, calculate the likely exposure, consider the company's assets and obtain advice before creditors begin enforcement action.
A company's liquidation does not normally release a director from a personal guarantee. However, enforcement is not always immediate, and receiving a demand does not necessarily mean that bankruptcy or the loss of a home is inevitable.
The position will depend on the guarantee's wording, the outstanding balance, the company's likely asset realisations, the director's personal finances and whether a commercial agreement can be reached with the creditor.
Molly Monks F.I.P.A of Parker Walsh is a licensed Insolvency Practitioner and provides clear, confidential advice to directors whose companies are experiencing financial difficulty.
Parker Walsh can review the company's insolvency position, explain how liquidation may affect guaranteed liabilities and help directors understand the practical steps that should be taken before company funds are moved or creditors are paid.
No. Liquidation deals with the company and its debts. A personal guarantee is a separate obligation and will normally remain enforceable according to its terms.
Not necessarily. The decision rests with the creditor and may depend on the amount owed, the likely recovery from the company, the available security and the guarantor's financial circumstances.
Potentially, yes. The creditor may not need to wait until the liquidation has concluded if the guarantee allows it to demand payment following the company's default or insolvency.
The company may pay its own debts in appropriate circumstances, but paying a personally guaranteed creditor shortly before liquidation can create preference concerns. Advice should be obtained before making the payment.
No. The creditor's rights will depend on whether the guarantee was secured, whether there is equity in the property and whether it obtains a court judgment or other enforcement order.
A creditor may accept instalments or another settlement proposal, but it is not obliged to do so. Any agreement should be affordable and confirmed clearly in writing.
I am Molly Monks, a licensed insolvency practitioner at Parker Walsh. I have over 20 years of experience helping directors with the financial struggles they may face. I understand that it can be overwhelming and stressful, so I offer practical straightforward advice, which is also free and confidential. I spend time with directors to get a good understanding of their business and their goals, therefore providing the best tailored advice possible.
Email: molly@parkerwalsh.co.uk
Phone: 0161 546 8143
WhatsApp: 07822 012199
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