A personal guarantee is a legal commitment made by a company director, ensuring that they will personally repay a company\’s debt if the company itself cannot fulfil its financial obligations. This arrangement provides additional security for lenders, particularly when dealing with new businesses or those with limited credit histories.
Types of Personal Guarantees
- Limited Personal Guarantee: This restricts the director\’s liability to a specific amount. For example, if a company secures a £100,000 overdraft, a director might offer a guarantee capped at £50,000.
- Unlimited Personal Guarantee: Here, the director is liable for the entire debt, allowing the lender to pursue the guarantor for the full outstanding balance if the company defaults.
Considerations Before Providing a Personal Guarantee
Before agreeing to a personal guarantee, it\’s crucial to seek independent legal advice to fully understand the terms and potential implications. Clarifying whether the guarantee applies to a specific debt or encompasses all existing and future debts (\’all monies\’ clause) is essential. Understanding these details helps in assessing the extent of personal risk involved.
Options if a Personal Guarantee is Called Upon
If a company defaults and a personal guarantee is invoked, the guarantor has several avenues to consider:
- Negotiation with Creditors: Open communication can lead to mutually agreeable repayment plans, such as instalments or a reduced lump-sum settlement.
- Debt Relief Order (DRO): Suitable for individuals with debts not exceeding £30,000, minimal assets, and low disposable income. A DRO can pause debt repayments for a year, potentially leading to debt forgiveness if circumstances don\’t improve.
- Breathing Space Scheme: This government initiative offers temporary relief from creditor pressure. A standard breathing space lasts up to 60 days, while a mental health crisis breathing space extends throughout the individual\’s treatment plus an additional 30 days.
- Individual Voluntary Arrangement (IVA): This formal agreement with creditors allows for manageable repayments over a set period, often resulting in the remaining debt being written off upon completion.
- Bankruptcy: As a last resort, bankruptcy can discharge most debts but comes with significant long-term financial and legal consequences.
In conclusion, while personal guarantees can facilitate business financing, they carry substantial personal financial risks. Directors should thoroughly evaluate their company\’s financial health and seek professional advice before committing to such agreements. If faced with a call on a personal guarantee, exploring the available options promptly can help manage and mitigate financial distress.
