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This publication has been rebranded from BRIdeas (Business Restructuring and Insolvency) to TRI Angles (Turnaround, Restructuring and Insolvency) to reflect our significant expertise in turnaround as well as restructuring and insolvency.

     

The Pros and Perils of Personal Guarantees (PGs)

Whilst in the UK at least there is a definite a winding down of the Government’s response to the pandemic, many businesses find themselves in uncertain times in particular with regards their financing and funding options.  Government backed loan schemes have largely been withdrawn and many businesses face new challenges with increasing costs, supply chain difficulties, availability of labour and most recently interest rate increases.


Since mid-2020 government backed loan schemes have been a principal source of financing for many businesses and balance sheets for some businesses are now heavily geared.  This can cause challenges for business seeking additional funding as gearing can affect lenders’ attitude to risk and willingness to lend. 

Additionally, we have seen funders’ enthusiasm to lend dampened by HMRC renewed preferential status, especially in circumstances where there no assets on which a funder can secure a fixed charge (thereby giving them priority over HMRC in the event of an insolvency).  As a result, directors are increasingly being asked to give PGs to banks, lending platforms, invoice discounters, financiers, and suppliers. 

For newly established or highly indebted businesses it is often the only way to obtain vital lending or credit is to give a PG and lenders often stipulating that it is ‘take it or leave it’ basis. However, some negotiation may be possible – for example having a cap on the liability, borrowing less for a shorter period, or excluding certain personal assets.  

The benefit of providing a PG is that it can facilitate lending, and, in most cases, it will never be called. If a guarantee is called then the perils for a guarantor and potentially their families are potentially serious, as if funds are not immediately available to repay it may be necessary for the guarantor to raise monies to repay the debt.  This could result in refinancing or even selling the family home to pay the debt. 


Responsible lenders are typically open to reasonable proposals for repayment, although their objective is normally to recover as much as possible as soon as reasonably practical.  Generally, lenders do not want to see the guarantor bankrupted as this invariably means that they will receive less.  Where a guarantor has given a number of PGs or has other debts then s/he have to consider insolvency options.

Where there are multiple guarantors, the guarantee is usually on joint and several basis, in which case a lender can, if necessary, choose who it is enforced against.  A guarantor who has paid has a right of contribution from the others.  It is common for spouses to also give guarantees or alternatively they may agree to relinquish rights to jointly owned property.

Increasingly, when a PG is called lenders are seeking charging orders against individual’s residences to improve their position in the event of bankruptcy as it changes the nature of the liability from an unsecured to a secured debt. We would suggest that guarantors take legal advice before consenting to a charge being placed on their property.  We also are finding it more and more common for trade suppliers to include personal guarantee clauses in their standard terms and conditions of trade and often included in the account opening process.  The existence of these clauses can come as a surprise especially when the PG may have been given years ago. 

Sometimes directors only recall the PG when they receive a letter demanding repayment because either it was a long time ago, or the clause may not have been drawn to the attention of the individual at the time the credit agreement was entered into.In these circumstances we would suggest that the guarantor takes legal advice concerning the validity and enforceability of such clauses.

It is, again, worth remembering that in most cases any lending by the business is repaid and a PG is never called upon.  When a personal guarantee is no longer required, as a matter of good housekeeping, the guarantor should request a return of the guarantee.  For example, if a PG was required to support an overdraft facility and the overdraft is no longer required directors should ask for the PG to be cancelled.  The danger of not doing so is that if the business requires an overdraft again at a later date the pervious PG may still be valid, and directors may be caught unawares. 


A cancellation of a PG should also be considered where a director is leaving a business and no longer wishes to be personally liable for its debts especially where s/he has no control.  Whilst you should be aware of any personal guarantees you have granted you may which to undertake an exercise to review any credit agreements.


When looking at your own business, seeking a personal guarantee from a customer to whom you are granting credit is always an option.  This is only likely to be practical and economical in cases where there is a large credit or an increased credit risk but if the individual is unwilling to grant a PG you may reasonably question why not.

     

If you have any questions or would like to get in touch, please do so by contacting any members of the TRI Team. Watch out for further newsletters from us, covering a variety of topics for restructuring your business.

Kind regards

Tom Russell  
     
   

The information in this newsletter must not be relied on as giving sufficient advice in any specific case.   

   
   
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