What Happens to Personal Guarantees in Liquidation?
When your company goes into liquidation, any personal guarantees you signed for loans become immediately enforceable. This means the guarantee is “crystallised,” and the responsibility for the debt shifts from your company to you personally.
As a result, creditors can now come after your personal assets to recover the money owed. The severity of your situation depends on the specifics of your guarantee. Here’s what you should focus on:
Caps on Liability: Is there a maximum amount you’re liable for?
Time Limits: Is there a timeframe for the creditor to enforce the guarantee?
Renegotiation Clauses: Does the guarantee allow for renegotiating the debt?
Conditions for Enforcement: Are there specific circumstances that trigger the guarantee or allow it to be cancelled?
Seeking professional legal advice as soon as possible is crucial. Prompt action can give you more leverage to protect your assets and potentially negotiate with creditors.
What will Happen When the Personal Guarantee is Activated in a Liquidation?
When your company enters liquidation, and your personal guarantee is activated, you can expect the following:
(1) Formal Notification: The creditor holding your personal guarantee will formally notify you that the guarantee has been activated due to the company’s liquidation.
(2) Demand for Repayment: You’ll receive a demand for repayment of the guaranteed amount.
(3) Secured Guarantee:
If your personal guarantee is secured against a specific asset, such as your home, the creditor will take steps to enforce this security. This could involve:
Initiating legal proceedings to take possession of the secured asset.
Forcing a sale of the asset to recover the debt.
Negotiating a repayment plan to avoid losing the asset (depending on location).
(4) Unsecured Guarantee or Insufficient Assets:
If the guarantee is unsecured or the secured asset doesn’t cover the full debt, the creditor may pursue additional recovery actions, depending on your location (e.g., England and Wales):
Obtaining a court judgment against you (e.g., County Court Judgment – CCJ).
Applying for a charging order on your property.
Seeking an attachment of earnings order from your employer.
In severe cases, petitioning for bankruptcy.
Can a Liquidator Offer Advice?
In the vast majority of cases, a liquidator (appointed insolvency practitioner) will not be able to advise you on what action to take. While insolvency practitioners have a duty of care towards the directors, they are primarily acting for the creditors. So they are likely to be acting for the very companies you have personal guarantees with and, therefore, cannot advise you personally by law.
In the liquidation engagement papers that you asked to sign before entering the liquidation process, you are advised to seek your help with regard to personal matters falling out of the liquidation.
Secured vs Unsecured Personal Guarantees
When you provide a personal guarantee for your business, it’s crucial to understand whether it’s secured or unsecured.
Secured Personal Guarantees are backed by specific assets, which could be personal or business-related. Examples include:
Property
Vehicles
High-value equipment
Investments
If your business defaults on its obligations, the creditor has the right to seize these secured assets to recover the owed amount. While this arrangement carries risks, it often leads to more favourable borrowing terms for your business due to the reduced risk for creditors.
In contrast, unsecured guarantees don’t involve specific collateral. This means:
Creditors have no pre-agreed assets to claim
Your entire personal financial portfolio is potentially at risk
Creditors may pursue legal action to recover the debt from your personal assets
Unsecured guarantees pose a higher risk to you as a director, exposing your personal finances more directly to your business’s liabilities.
Can Directors Get Out Of A Personal Guarantee If The Business Is Insolvent?
In most cases, directors cannot easily get out of a personal guarantee when their business becomes insolvent. Personal guarantees are specifically designed to protect creditors in such situations, remaining enforceable even if the company can’t meet its obligations.
However, while escaping a personal guarantee is challenging, there may be some options to explore:
Negotiating with the creditor for a reduced settlement or manageable payment plan
Challenging the guarantee if there were irregularities in how it was obtained
Reviewing the guarantee’s terms for any limitations or time constraints
Contesting a Personal Guarantee
While challenging a guarantee is complex, there are several strategies a skilled lawyer might employ:
Deviation from original loan terms: If the creditor has altered the original agreement without your consent, this could potentially invalidate the guarantee. For example: • Extending repayment terms beyond those initially agreed • Increasing the loan amount without informing the guarantor
Creditor negligence: If the creditor has mishandled other security held against the same liabilities, this might affect the enforceability of your guarantee.
Alteration of principal’s liability: Changes to the primary borrower’s obligations without informing you as the guarantor could potentially void the guarantee.
Case law has provided some precedents in this area. In Triodos Bank NV v Dobbs [2005][1]Trusted Source – Mondaq – Triodos Bank NV v Dobbs [2005]
, the court held that a significant increase in the principal debtor’s liability, without the guarantor’s consent, discharged the guarantee.
However, it’s crucial to note that contesting a personal guarantee should only be undertaken with:
The guidance of an experienced commercial lawyer
Sufficient funds to cover legal fees
A robust argument supported by clear evidence
FAQs about Personal Guarantees in Liquidation
Is it Possible to Revoke a Personal Guarantee During Liquidation?
Revoking a personal guarantee during liquidation is generally not possible without the consent of the creditor. Moreover, the terms of the guarantee agreement may include clauses that specifically address this situation.
What is the Statute of Limitations on Enforcing a Personal Guarantee?
The statute of limitations varies by jurisdiction but is generally six years in the UK. However, certain actions by the creditor or director can reset this time period.
What Happens if There Are Multiple Directors With Personal Guarantees?
If multiple directors have provided personal guarantees, the terms of each guarantee will dictate how liability is shared among them. It is possible for one director to be held more liable than others, depending on the agreement.
Is the Director’s Personal Guarantee Enforceable After Resignation?
Yes, resigning as a director does not automatically discharge a personal guarantee. The director will continue to be liable for the guaranteed debts unless explicitly released by the creditor.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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