Personal Guarantees on insolvency – Bridge Newland
As you can imagine, personal guarantees are a hot topic when it comes to a insolvent Liquidation & Administration as often company directors are either unaware that they have signed a guarantee or they simply don’t know what the guarantee provider will do to call their debt in when the insolvent company can’t afford to repay the debt itself.
This article looks to provide useful guidance to advisers who have clients with personal guarantees by giving some general issues to look out for and then what happens on insolvency.
PERSONAL GUARANTEES – General Pointers…
1. PREFERENCES – Be careful to ensure that your client does not prefer the guarantee providers ahead of all other creditors. This is because any appointed Insolvency Practitioner has to review all transactions and unless creditors are paid in the ordinary course of business (where the oldest and most aggressively chased creditors get paid first) there is a risk that the IP will have to request funds paid to them back or personally repay them to the insolvent estate.
2. JOINT AND SEVERAL – This means that whoever has signed the guarantee is responsible for the whole debt and not just their share. If one guarantor has the funds to repay the sums outstanding but another guarantor does not then after both have been chased they are likely to establish who has the funds to repay the debt and pursue that guarantor for the full balance therefore care should be taken when signing guarantees if you are aware that the position of the guarantors are not equal.
3. TRADE ACCOUNTS – Most construction and building works businesses I undertake a Liquidation or Administration for will have a number of trade suppliers which include trade accounts. These trade accounts often have personal guarantees from the company’s directors for the credit the Company is provided but the directors are completely unaware that they have signed them. Therefore directors should avoid signing the guarantee section of the account or search for trade account suppliers that do not request guarantees.
4. GUARANTEE VALID? – If the signing of a guarantee cannot be avoided then care should be taken to check whether the word “GUARANTEE” is clearly shown and if it advises the signee to take their own independent advice because without these key factors the guarantee is usually invalid and not enforceable. However I am not a solicitor and therefore if you are unsure you should seek their qualified advice.
5. GUARANTORS BECOME CREDITORS – If the guarantors settle any of the company’s debts to a guarantee provider then they become a creditor in the insolvency process for the sums they have paid. Therefore make sure that your clients are aware of this because if dividends are paid to creditors from the insolvency process then they are entitled to receive monies as much as the other creditors.
What Happens to Personal Guarantees in Liquidation and Administration?
Typically the guarantee provider will issue a demand for the full balance due plus interest and charges from the guarantors immediately upon them becoming aware that the limited company has become insolvent. This demand is usually a standard letter and will be threatening in its form but guarantors should not overly worry about the contents as it will then be passed to a department tasked with making arrangements for repayment who are usually commercial and will be understanding of the guarantor’s position.
In at least 50% of the cases I deal with I have found guarantee providers, and usually the banks, will simply convert the company debt into a personal loan over a period which is agreeable with the guarantor or assign it to a new co. This allows the guarantor to pay this loan amount from any income that they earn after the insolvency of their company rather than having to find a lump sum amount immediately. Also, these loans can often not start for many months.
In cases where the guarantors have some funds now or can get hold of some funds then offers can be made to the guarantee providers at a reduced amount where substantial amounts can be discounted for early settlements.
Alternatively, repayment plans can be agreed therefore my advice is always to recommend to your clients that the contact the guarantee providers and offer (and pay) what they can afford as it shows their willingness to repay the debt and is likely to be taken more seriously if offered before they receive red letter demands.
If you or your client need any further advice about personal guarantees or insolvency processes generally then contact our offices free on 0800 612 6197 or review the rest of our website. If we cannot help then we also have a number of contacts who can represent you to defend guarantee claims therefore do not hesitate to call now.