Personal Guarantees and Liquidation
If your company is approaching liquidation and you have personally guaranteed any of its debts, you need to understand what those guarantees could mean for you.
A personal guarantee is separate from the company’s liability. If the company cannot repay the guaranteed debt, the creditor may be able to pursue you personally in accordance with the terms of the guarantee.
Putting the company into liquidation does not normally cancel a valid personal guarantee.
The important questions are therefore: what have you guaranteed, how much could you be liable for, when can the creditor enforce the guarantee and what options do you have for dealing with the personal exposure?
What is a personal guarantee?
A personal guarantee is a legally binding commitment by an individual to repay a company debt if the company fails to meet the relevant obligation.
Directors and shareholders are commonly asked to provide guarantees when a lender, landlord or supplier is unwilling to rely solely on the company’s own financial strength.
Personal guarantees are commonly associated with:
- Business bank loans
- Overdrafts
- Asset finance
- Invoice finance
- Commercial property leases
- Supplier credit accounts
- Business credit cards or facilities
- Other commercial borrowing
The company remains primarily liable for its own debt, but the guarantee gives the creditor an additional route of recovery against the guarantor personally.
What happens to a personal guarantee when the company enters liquidation?
The guarantee does not usually disappear.
The creditor can make a claim in the company’s liquidation for the amount owed by the company while also preserving any rights it has against you personally under the guarantee.
If the creditor eventually receives money from the liquidation, that may reduce the remaining balance for which you are liable. The creditor should not recover more than it is properly owed overall.
However, directors should not assume that the creditor must wait until the liquidation has been completed before taking action under the guarantee. The creditor’s rights depend on the terms of the guarantee and the underlying finance agreement.
How much could I be personally liable for?
The answer depends on the wording of the guarantee.
A guarantee may be:
- Capped – your liability is limited to a stated maximum amount
- Unlimited – it may cover the full outstanding company debt
- Secured – supported by security over a specific personal asset
- Unsecured – enforceable against you personally without specific security being granted
- Joint and several – where more than one guarantor may each be liable for the whole guaranteed amount
The guarantee may also cover interest, legal expenses and enforcement costs in addition to the principal debt.
Do not rely solely on the amount you remember agreeing to. Obtain a copy of the signed guarantee and review its actual terms.
What is the difference between a secured and unsecured personal guarantee?
Secured guarantee
A secured guarantee is supported by security over a particular personal asset. Depending on the documentation, this could include a charge over property.
If the guaranteed liability is not paid, the creditor may ultimately be able to enforce its security as well as pursue the contractual debt.
Unsecured guarantee
An unsecured guarantee does not give the creditor an existing charge over a particular asset. It nevertheless creates a personal debt if the guarantee becomes enforceable.
If that debt remains unpaid and the creditor obtains the necessary legal remedies, ordinary personal debt-enforcement consequences may follow.
The distinction matters because a creditor holding specific security may have a more direct route against the asset covered by that security.
Can a creditor pursue me immediately after liquidation?
Potentially.
The point at which the creditor can make a demand depends on the wording of the guarantee and the underlying agreement.
A creditor may already have rights under the guarantee because:
- The company has missed contractual payments
- The borrowing has been formally demanded
- The lender has terminated the facility
- The company entering insolvency constitutes an event of default
- The guarantee becomes payable under another contractual trigger
Do not assume that the lender must exhaust every recovery option against the company before contacting you personally. Some guarantees permit direct action against the guarantor once the relevant default has occurred.
If you receive a formal demand, have the guarantee and demand reviewed promptly rather than ignoring it.
Can the lender claim in the liquidation and against me personally?
Yes, subject to the terms of the guarantee and the normal rule that the creditor cannot ultimately recover more than the debt it is owed.
For example, if a lender is owed £100,000 and later receives £20,000 from the company’s liquidation, the amount outstanding under a full guarantee may reduce accordingly.
The precise accounting between the company debt, security, recoveries and guarantee should be checked carefully where significant sums are involved.
What if there are several guarantors?
Multiple directors or shareholders may have guaranteed the same debt.
The key issue is whether liability is several, joint, or joint and several.
Under a joint-and-several guarantee, the creditor may be entitled to pursue one guarantor for the entire amount covered by the guarantee rather than dividing the claim equally between the guarantors.
A guarantor who pays more than what they believe to be their appropriate share may have separate rights against co-guarantors, but that is a different issue from the creditor’s contractual rights.
Where several directors have given guarantees, each person should understand their own documentation rather than assuming that everyone has signed identical terms.
Could my home be at risk?
Potentially, but the existence of a personal guarantee does not automatically mean that your home will be taken.
The risk is greater where:
- The guarantee is specifically secured against your property
- The guaranteed debt is substantial
- You cannot reach an affordable settlement with the creditor
- The creditor obtains legal remedies against you personally
- Your overall personal financial position becomes insolvent
An unsecured guarantee does not itself give the lender an existing charge over your home. However, an unpaid personal debt can still result in legal enforcement and potentially wider personal insolvency consequences.
If a guarantee is secured against your home or another important personal asset, independent legal advice on the security documentation is particularly important.
Can personal guarantees be negotiated?
Often, the position can at least be discussed with the creditor.
Depending on the circumstances, possible outcomes can include:
- Repayment over an agreed period
- A temporary payment arrangement
- A negotiated full-and-final settlement
- Agreement to await particular recoveries from the company
- Restructuring or refinancing of the personal liability
None of these outcomes is automatic. The creditor will normally consider matters such as the amount owed, the strength of the guarantee, your financial circumstances, available assets and the likely recovery through enforcement.
Early engagement can be preferable to waiting until proceedings have become more advanced and additional costs have been incurred.
Should the company repay a debt that I have personally guaranteed before liquidation?
Directors need to be very careful about this.
Repaying a personally guaranteed company debt may improve your own personal position because it reduces or removes the creditor’s claim under the guarantee.
However, once a Scottish company is insolvent, payments that prefer one creditor over the general body of creditors can be scrutinised under the Scottish insolvency rules.
The fact that you have personally guaranteed the debt is particularly relevant because paying that creditor can also relieve your own personal exposure.
Do not use remaining company funds simply to clear personally guaranteed debts before a CVL without taking insolvency advice first.
What if I have already repaid a personally guaranteed creditor?
Tell the insolvency practitioner.
The liquidator will review relevant transactions entered into before liquidation, including payments to creditors.
The existence of a payment to a guaranteed creditor does not automatically mean it will be successfully challenged. The facts, timing, company’s financial position and applicable legal tests all matter.
Do not attempt to conceal the payment or alter records. Provide the information and allow the transaction to be considered properly.
Does the government guarantee on a business loan protect me personally?
Not necessarily.
A government-backed lending scheme usually provides a guarantee to the lender. It does not automatically remove the borrower’s responsibility for the debt or cancel a separate personal guarantee where the scheme permits one.
The position depends on the particular scheme and the finance documents.
For example, the original Bounce Back Loan Scheme did not permit personal guarantees, whereas other business lending schemes and ordinary commercial facilities can operate differently.
If you are uncertain whether a particular facility was personally guaranteed, obtain the signed loan and guarantee documentation rather than relying on memory.
What if the company has not entered liquidation yet?
This is often the best time to review personal guarantees.
Before the company enters a CVL, we can identify:
- Which company debts appear to be guaranteed
- The approximate amount outstanding
- Whether guarantees are capped or unlimited
- Whether any guarantee is secured
- Whether several guarantors are involved
- Which creditors are likely to make demands following insolvency
- Whether company asset recoveries may reduce the guaranteed balance
- Which matters require separate legal advice
This can help directors understand their personal position before deciding how the company itself should be dealt with.
What documents should I find?
Useful documents include:
- The personal guarantee itself
- The original loan or finance agreement
- Any later variation or refinancing documentation
- Statements showing the current amount outstanding
- Security documents
- Commercial leases
- Correspondence from the lender or creditor
- Any formal demand already received
- Documents signed by other guarantors
If you cannot find the guarantee, ask the creditor or lender for a copy. Do not assume that because you remember signing something years ago it necessarily has the scope you think it does today.
Can a guarantee be invalid or unenforceable?
There can be disputes about whether a guarantee is enforceable or about the extent of the liability under it.
Potential issues can depend on matters such as:
- The wording of the guarantee
- Whether the relevant debt falls within its scope
- Whether subsequent changes to the underlying facility affect the guarantee
- Whether contractual requirements for making a demand have been followed
- Whether the creditor is seeking more than the guarantee permits
- Other legal issues relating to execution or enforceability
These are legal questions rather than insolvency-accounting questions.
If there is a substantial guarantee or a genuine dispute about enforceability, we would normally recommend obtaining independent legal advice rather than simply accepting or rejecting the creditor’s demand.
What if I cannot afford to pay the guarantee?
Do not ignore the position.
If a valid guarantee creates a personal debt that you cannot pay in full, possible next steps may include:
- Negotiating directly with the creditor
- Seeking an affordable payment arrangement
- Exploring a commercial settlement
- Obtaining personal debt advice
- Considering formal Scottish personal debt solutions where necessary
Company insolvency and personal insolvency are separate matters. The company entering liquidation does not automatically mean that the guarantor personally becomes insolvent.
If your personal liabilities are substantial in relation to your income and assets, specialist personal debt or legal advice may be appropriate.
Personal guarantees FAQs
Does a personal guarantee disappear when my company is liquidated?
No. A valid personal guarantee is a separate personal obligation and normally continues despite the company entering liquidation.
Can a lender pursue me before the liquidation finishes?
Potentially. The timing depends on the guarantee and underlying finance documents. Do not assume that the creditor must wait until all company assets have been realised.
Can the lender take my house?
Not automatically. The position is particularly important where the guarantee is secured over your property. An unsecured guarantee can still create a substantial personal debt and lead to enforcement if it remains unpaid.
Can I negotiate the amount?
Possibly. Creditors may consider payment arrangements or commercial settlements depending on the circumstances, but they are not required to discount a valid guarantee simply because the company has failed.
What if another director also guaranteed the debt?
Check whether the guarantees are joint and several. If they are, a creditor may potentially pursue one guarantor for the whole guaranteed liability, subject to the contractual terms.
Should I repay the guaranteed lender from company funds before liquidation?
Not without taking advice. Paying a creditor whose debt you have personally guaranteed can improve your own position and may require scrutiny if the company is already insolvent.
Was my Bounce Back Loan personally guaranteed?
The Bounce Back Loan Scheme did not permit personal guarantees. That does not prevent separate issues arising concerning how a Bounce Back Loan was obtained or used, but the ordinary scheme loan was not supported by a director’s personal guarantee.
Should I get legal advice about my guarantee?
If the guarantee is substantial, secured, disputed or already being enforced, independent legal advice can be sensible. Insolvency advice can help identify the exposure, while a solicitor can advise on interpretation and enforceability of the particular document.
Worried about personal guarantees if your company is liquidated?
We can consider your company’s financial position alongside any personal guarantees and help you understand how the company insolvency and your personal exposure interact.
Where a guarantee requires specific legal interpretation, we will explain when independent legal advice is appropriate.
The initial discussion is confidential and does not commit you to placing the company into liquidation.