Personal Guarantees
21st April 2014
As a director of a limited company, it is standard practice for lenders (and indeed some suppliers) to request that you sign a Personal Guarantee (PG) to act as security for company borrowing. By doing this, the creditor will have recourse to the director personally in the event the company defaults. PGs are not used for sole traders or partnerships (except LLPs) as any debt of the “company” is deemed as a personal liability of the business owner(s) and so a PG is not required.
If you have been asked to sign a PG, you should always seek independent legal advice before signing anything as the terms can vary (it is not uncommon for the banks to request a legal charge over your home at the same time). It is also worth noting that most banks will keep a PG on file indefinitely, even once the borrowing has been repaid.
In the event that a PG is called upon, the next step can vary depending on the creditor and the amount being called on. The usual routes are:
- The creditor will issue a Statutory Demand. This will give you 21 days to either settle the debt or reach an agreement to pay. If this is not possible, the creditor can start bankruptcy proceedings (providing of course that the debt is over £750 which is usually the case with PGs).
- The creditor can apply for a County Court/High Court Judgement. The usual results will be that they then wither get a Warrant of Execution and get the bailiffs in, or they go for a Charging Order to secure the debt against your home.
If a PG is called upon, the first route is to get legal advice to ensure it is valid. If it has not been drawn up and/or executed correctly, it could well be invalid. The second route is to talk to the creditor (if you haven’t already). Legal action can be a lengthy and costly affair and most creditors would entertain a negotiated settlement as long as there is a strong commercial case for them to do so.
The best way to protect yourself would be to seek professional help prior to the default event which causes a PG to be called upon. The earlier the professionals get involved, the more tools they have at their disposal to help you. If you have a PG that is being called upon, do remember there is still help at hand, but the available options are somewhat reduced.
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.