Dealing with Personal Guarantees on Insolvency

I always ask the directors of a trading company seeking Insolvency Advice, whether or not they have given any suppliers or the Bank Personal Guarantees. Directors can usually recall whether or not they have provided the Bank with a Personal Guarantee for the overdraft but frequently forget that they may have provided a Personal Guarantee to Suppliers when they opened a trading account on behalf of the Company. This isn’t surprising bearing in mind that they would have often opened trade accounts when the business commenced trading which may have been several years ago.   I am frequently asked what the consequences of the Guarantee will be on the liquidation of a Company. The whole purpose of a Supplier/Bank obtaining a personal guarantee is that in the event that the Company goes into liquidation the Creditor will have a Personal claim against the Director. We are often asked how it is best to deal with a Personal Guarantee to a Bank. On the basis that the Director has some assets and/or an income, I always advise the Directors to contact the Bank promptly and explain the situation to them. The reason for this is that once a Company goes into Formal Insolvency the Bank passes the file onto their collection department. They are used to dealing with these situations and are well aware that in most cases the Director will have either just lost his business/job and will have little or no funds until such time as he has obtained employment or started a new business. However the fact that you have contacted them and tried to make some arrangements even if it is only to pay a nominal sum each month until he is back on his feet, is usually sufficient. From the Banks point of view, at least you are acknowledging the debt exists and seeking to come to some arrangement to sort the matter out. The Bank will usually look to review the position after 3 or 6 months, looking for an increase in payments so that the debt can be paid of in a reasonable period.

The position with Trade Creditors is more problematic. In many instances they are looking for immediate payment and some creditors in certain trades seem to take a much more aggressive approach.   I have come across the position where a creditor who has had a Retention of Title claim, where some of the stock is abandoned has then sought to enforce the balance of the claim against the Director who provided the Personal Guarantee. When in this situation the Director argued that whilst he was liable for the part of the Claim not covered by the Retention of Title, he should not be liable for the suppliers failure to enforce all of their Retention of Title claim. In this example the supplier was owed £2,000 there were Retention of Title goods for the value of £1,400, the Supplier only took back £700 worth of goods and sort to enforce the guarantee for the £1,300. The Director argued with the supplier that he should only be liable for £600 on the basis that if they had taken all the goods they were entitled to that was all they would have been owed.

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