Standard practice of many lenders, and sometimes suppliers, is to ask for a personal guarantee from a company director to act as security for borrowing.
A personal guarantee from the director of a company means that the creditor will have recourse to the director personally in the event the company defaults.
So if you’ve been asked to personally guarantee that the debt will be paid, this means that you will be liable if the company defaults. You’re basically saying that you trust that the company will be able to pay its debts.
What Could I be a Personal Guarantor For?
There are any different things that may need a director’s personal guarantee, including:
- Business bank loan applications
- Property leases
- Invoice finance arrangements
- Trade supply deals
- Asset leasing agreements
As with anything involving contracts, the first thing you must do is seek independent legal advice before signing as terms can vary. It’s not uncommon for banks to request a legal charge over your home at the same time, securing your guarantee further. It is also worth remembering that most banks will keep a personal guarantee on file indefinitely, even once any borrowing has been repaid.
A personal guarantee puts you, your personal assets and wealth at risk if the company fails to satisfy any demand for payment made under it. So, if there has been a legal charge made over your house, this would be at risk too.
Guarantees can be a way to secure larger borrowing, but they must be entered into carefully and you must consider all the eventualities if the company was to fail to adhere to any of the contract terms.
What Happens When a Personal Guarantee is Called Upon?
If your company defaults and you are called on as guarantor, the next step can vary depending on the creditor and the amount being called on. Usually you will receive a letter referring to your liability and asking you to make the payment under the guarantee. If you do not make the payment one of the following routes could be used alongside any action against the original debtor, the company:
- The creditor can issue a Statutory Demand. This gives you 21 days to settle the debt or reach a payment agreement. If this isn’t possible, the creditor can start bankruptcy proceedings against you personally.
- The creditor can apply for a County Court or High Court Judgment. This will affect your credit rating and can result in enforcement action such as getting the bailiffs in. Or, if they don’t already have one, they will ask for a Charging Order to secure the debt against your home which can then proceed to an order for sale of that home.
If the creditor already has a charge against your property, they may apply straight away for an order for sale of that property if another payment arrangement cannot be agreed.
In the event a personal guarantee is called on you will need to seek legal advice immediately. If the guarantee hasn’t been drawn up or executed correctly, lawyers may help you assert its invalidity and unenforceability. Alternatively, a lawyer can help you through negotiations to settle the demand.
The most important thing to remember if you are considering giving your personal guarantee in respect of your company’s ability to pay debts is that if anything goes wrong you are personally responsible.
If you need any legal advice about becoming a personal guarantor, or you have already given one and you’re being called on to make a payment, call our team at Slater and Gordon UK. We have many years’ experience working with companies to ensure that contracts are valid and legal. Call us on 0800 916 9052 or contact us online and we will call you.