Understanding your personal liabilities in relation to company debt
As a Company Director, circumstances may arise where you find yourself in a position to offer a personal guarantee to support a line of credit. This may seem like a decision worth taking to enable your company to move forward and reach its true potential; however, this does not come without risk. In a situation where a company is unable to maintain its debts and is in a position of financial distress, a personal guarantee can often become a cause for concern for directors, and in the current climate, where the viability of businesses is a major worry, offering a personal guarantee has an increased risk.
What is a Personal Guarantee?
A personal guarantee is a promise made by an individual to personally pay back any amounts owing to a Lender should a company not be in a position to pay back the amounts borrowed. A personal guarantee provides a lender with extra security should a company default on its obligations.
There are a range of scenarios in which a credit provider may ask a Director to provide a personal guarantee.
Some of the most common include:
- Business Loans
- Invoice Financing Agreements
- Mortgages
- Leases
- Hire Purchase and Operating Lease Arrangements
- Trade Supplier Accounts
What benefits are there to signing a personal guarantee?
Securing credit
The most obvious benefit of providing a personal guarantee by a director is that it will improve a company’s chances of securing credit. Providing a personal guarantee may open up new lines of credit or may mean that a company is able to access a higher amount of funding.
New businesses
If you have recently started a new business you will have no recent trading history and may encounter difficulty in obtaining funding; this may be through obtaining loans and other facilities, or include opening Trade Supplier Accounts. By providing a personal guarantee, this may help you to secure credit for your company.
Risk vs. reward
The benefits of providing a personal guarantee do not however come without some risk. Should your company default on payments of credit, or become in a position where it will be unable to pay creditors back, you will become personally liable.
Without a valid personal guarantee, creditors are unable to pursue directors personally for amounts owed.
For some directors whose companies are in financial difficulty, this may lead to long-lasting financial problems on a personal level, jeopardising personal assets and plans for the future.
Considerations
Before providing a personal guarantee, careful consideration must be given to ensure that you are comfortable with all of the terms of the guarantee. You should always ensure that you obtain appropriate legal advice to establish this.
Key considerations include:
- Are there any caps on the personal liability or not? What amount will you be liable for should your company default and when are interest and charges applied?
- What constitutes as a default; how and when are your creditors entitled to enforce guarantees provided?
- Will notice be served on you prior to pursuing a personal guarantee or can creditors demand immediate payment?
- Do future variations affect personal guarantees given; can a credit provider vary terms without consultation?
- How are your net assets assessed; are you in a position to provide a guarantee and is this position likely to change?
Are you aware of all guarantees given?
You should ensure that you are aware of all personal guarantees that you have given and how these may affect you personally. You should take steps to establish the impact by:
- Obtaining and reviewing copies of terms and conditions for all loans, mortgages and overdraft facilities undertaken.
- Locate all hire purchase and operating lease documentation, review the terms and conditions and establish if any personal guarantees have been given.
- Ensure you have copies of all trade supplier account opening application forms and review the small print and terms and conditions to establish if any personal guarantees have been provided.
- Monitor your company’s finances and establish the full personal liability you may be subject to.
Establish your own personal position by undertaking a review of your own assets and liabilities.
If your business is in trouble, seek advice early.
Since 1 December 2020, certain liabilities owed to HM Revenue & Customs in the event of a formal insolvency (VAT, PAYE, CIS, employees’ National Insurance contributions) all rank ahead of any floating charge liabilities, as they are now classed as secondary preferential creditors. Unfortunately, this means that any benefit that would have ordinarily been used to meet the outstanding floating charge in an insolvency process is now reduced by the amount owed to HMRC for the above-mentioned liabilities. Accordingly, there is now an increased risk that there will be a call upon personal guarantees where previously there would have been sufficient reliance on the floating charge security. Taking advice early from a Licensed Insolvency Practitioner if your business is distressed will help you to understand the potential liabilities on a director personally, especially if there are further delays in opening up following the restrictions easing.
In Summary
Giving a personal guarantee may help you to secure new finance for your company however this does not come without some risk. You should always obtain independent legal advice prior Home Page to undertaking a personal guarantee. If you are concerned about your position in regards to personal guarantees undertaken and what this means for the future, seek advice early.