Personal guarantee requests by lenders and creditors
Since the outbreak of the Covid-19 pandemic, insolvency practitioners have seen a steady rise in enquiries from businesses, directors and lenders requesting advice and guidance around funding options including personal guarantee requests.
The Government has introduced a package of measures in an attempt to maintain business continuity including the Coronavirus Job Retention Scheme (CJRS) and the Coronavirus Business Interruption Loan Scheme (CBILS). Whilst full details of both schemes are not as yet available, in very broad terms:
- the CJRS provides a non-repayable grant directly from Government covering 80% of the monthly salary costs of eligible furloughed employees capped at £2,500; and
- the CBILS is a loan scheme with funding to be provided by commercial lenders and backed by a government guarantee.
Under the CBILS Scheme a lender is only permitted to insist upon the provision of a personal guarantee if the loan is in excess of £250,000 (and even then the terms of any such personal guarantee are further restricted). However, it is often a pre-requisite that a lender or creditor advancing funds or supplies to a business will require those individuals in control of the business (typically director(s)) to provide a personal guarantee. A personal guarantee is intended to provide the lender or creditor with security for further borrowing and/or the continued supply of goods or services needed to enable the business to continue to operate.
In short, by providing a personal guarantee, the director takes personal responsibility for repayment of the liability to the lender or creditor in the event that the company fails to do so. For a variety of reasons, directors often provide personal guarantees having given only limited consideration as to the potential consequences if it is necessary for the personal guarantee to be called upon or enforced.
Where a personal guarantee is enforced, then in order to satisfy the liability to the lender or creditor, a director’s personal assets will be at risk, they may have to sell the family home or worse still, face bankruptcy. It is notable that most lenders will hold a personal guarantee on file indefinitely and may still seek to enforce it against the individual long after they have ceased to be a director of a particular company.
Before providing a personal guarantee, a director should always explore whether other funding options are available to the company and it should generally only be provided when alternative funding options have been exhausted.
When providing personal guarantees, independent legal advice should be sought. In particular, it is important to:
- Understand the precise nature and extent of the liabilities being guaranteed;
- Seek to negotiate, at the outset, a cap on the extent of the guaranteed liabilities;
- Ensure clarity as to the duration of the personal guarantee and the circumstances in which it will be released (thereafter, obtaining written confirmation of its release at the appropriate juncture);
- Consider whether insurance may be available to cover the personal guarantee liabilities.
It is hoped that, under the current circumstances, creditors may be persuaded to adopt a less aggressive approach to enforcement of security, at least in the short-term. If a creditor is threatening to enforce a personal guarantee you have given, or you are concerned they may do so, it is important to seek advice and understand the options available to you at the earliest opportunity.
We are here to offer advice and assistance through these turbulent times. If you wish to discuss any aspect of insolvency (personal or business) or any issues arising from this article, please contact John Bradshaw or Sarah Mower, dedicated insolvency specialists in our Insolvency & Business Recovery Team.
John Bradshaw is a partner and specialist in Insolvency & Business Recovery at Barker Gotelee Solicitors.