Personal Guarantees (PGs) increasingly causing insolvency problems
Graywoods have seen a big increase in the number of people who are approaching us for advice about how to deal with Personal Guarantees (PGs) that are being enforced against them and which are causing them considerable financial problems.
There is an old adage about Personal Guarantees – always ask for a Personal Guarantee but never give one. That has never been more pertinent in today’s business world.
A Personal Guarantee is an unsecured and legally-enforceable promise given by one person on behalf of another. A PG is often given by a director or other senior person within a company, on behalf of that business, that they will pay the debts of the company in the event that the company itself cannot afford to pay. For creditors, this is a way of circumventing the doctrine of ‘limited liability’ by making the individual behind a company liable for its debts if the business cannot pay.
It is common for a PG to be requested by a bank in respect of an overdraft or business loan, particularly where the amount involved is relatively low and the bank does not wish to go to the expense of taking a debenture over the company. In the case of small businesses, the company may not have sufficient assets to back up the borrowing in any event and therefore the bank seeks comfort that the director will not be tempted to walk away from the business, leaving the bank ‘high and dry’.
Landlords may ask for PGs when granting a lease to a company with little or no trading history. Suppliers may also seek a PG when opening a new credit account, particularly in the construction industry where materials wholesalers commonly seek PGs before supplying goods on credit.
We have also seen a big increase in the number of ‘alternative lenders’, such as crowd-funding lenders, that routinely take a personal guarantee from the directors of a company as a condition of providing funding to the business.
Directors often tell us that they gave a PG because they thought they would never actually be chased by the creditor, even if their company failed to pay. Being asked to sign a PG may be seen as a ‘necessary evil’ by some directors but it is important to remember who has been given a PG and, wherever possible, credit terms should be renegotiated as soon as possible to remove the guarantee where it is no longer required. In particular, where an individual leaves a company and is no longer involved, they need to ensure that any PGs that they gave previously have been withdrawn, which normally requires the explicit consent of the creditor concerned.
Certain creditors, particularly alternative lenders, are increasingly prepared to robustly pursue those who have given them a PG, where the company itself has gone into insolvency. In some cases, this can result in the individual being declared bankrupt.
There are ways of mitigating the effects of a PG if a creditor seeks to enforce it. We work with PG specialists to advise directors on their options if they are facing an unaffordable request for payment under a PG. If necessary, an Individual Voluntary Arrangement (IVA) may be needed to compromise debts if they are threatening an individual with insolvency.
Graywoods is here to help
Are you facing insolvency as a result of Personal Guarantees (PGs)? If so, call Graywoods today for expert advice on how to deal with them.
Call Deborah Lockwood today on 0114 285 9500 for friendly, impartial advice. We can help.