One of the main benefits of forming a limited company is that the directors have no ongoing liability for any debts incurred through trading. This means that if things end up going badly the directors won’t owe any money as the debts stay with the firm.
However, often banks, leasing companies and landlords ask for personal guarantees from directors so that they can still collect if the company goes into liquidation. Expansion into new premises or borrowing money is usually done in times of optimism but as we all know business is a fickle thing and should things not turn out as expected then directors may find themselves in a difficult position.
When a bank lends to a small business or a newly created start-up they may take a debenture on the assets of the company but will also seek to get an unsecured guarantee from one or more directors. It is unusual to be able to get out of a directors guarantee.
An unsecured guarantee means that they can seek to claim any shortfall in assets over liabilities from the directors. The guarantee won’t be secured on any particular asset; it’ll just be a requirement to pay over cash. Clearly, this can cause directors a large amount of stress and possibly financial difficulties.
Occasionally the creditors may ask for a secured guarantee, this means that they take a charge over a specific asset such as the director’s house. Alternatively, they may mix the two, by naming some existing assets, ensuring that the director cannot sell without their express permission but also a general charge over anything else.
When the business gets into difficulties it’s important that the directors don’t get treated any better than other creditors. Buying out a personal guarantee would be an example of this and is to be discouraged although in practical terms it is probably difficult to achieve in these circumstances.
If a business is considering taking action such as a Company Voluntary Agreement (CVA) or liquidation or if the directors think that there’s a possibility that a creditor may force liquidation upon them then it’s important to take swift advice. Get in touch with a licenced insolvency practitioner and seek legal advice as to the validity of the personal guarantee.
Gaining a CVA with current creditors of the business will not remove the guarantee automatically but will allow the business to continue trading in an attempt to pay off its debts. If the firm can achieve this and successfully exit the CVA then the guarantee can be released. This is obviously the preferred option but of course is only available if the underlying business is sound.
If the creditor seeks to enforce the personal guarantee following liquidation then they will send a statutory demand for payment.
The first order of business is to try and negotiate a settlement. If they have a charge on the director’s property then achieving an agreement here will release the charge and any threat to their home will be ended. Court costs are expensive and obtaining a judgement can be time-consuming for the creditors. Many will accept a reasonable offer rather than go through the hassle of the court process.
If you are interested in learning the benefits of a company liquidation then please go here.