The current crisis is putting many businesses’ cash flow under pressure. In many cases, company liabilities have been deferred and may be left unpaid if the company is forced to go out of business. Company directors need to consider their personal exposure to company creditors through previously agreed personal guarantees.
A personal guarantee is a legal undertaking by an individual to repay another person’s debt. When directors seek funding for their business and sign a personal guarantee, it is a legally binding waiver that bypasses the limited liability status of a limited company during debt recovery.
In essence, a personal guarantee agreement holds the director personally liable if the business is unable to repay money owed. There are many reasons why a director might be willing to provide personal guarantees in support of a business loan, property lease or line of credit. The individual providing these guarantees will typically have assumed that the creditor would never have any cause to call on the guarantee in a manner that affects their personal assets.
Typical areas where liabilities might be personally guaranteed are:
In the current climate, we are likely to see many instances of personal guarantors being called on to satisfy company debts. In difficult circumstances, this will inevitably lead creditors to seek court approval for mandated and priority claims on the guarantor or their personal property and income.
In seeking to recover sums under a personal guarantee, the creditor must:
The methods by which judgments may be enforced include the following:
A risk for the guarantor in allowing a creditor to attain a judgment and utilise the different collection methods is that the costs of the legal process and ongoing interest will be added to the sum due, thus further increasing the liability to be paid.