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Business insolvency can be a worrying time for Directors who’ve given personal guarantees on company loans. One of the advantages of being the Director of a Limited company is the legal separation of the business and the person (or people) in charge. During a company insolvency for instance, no matter how much the company owes to its creditors, the Directors, provided they behaved properly, cannot be pursued for outstanding debt. However, this is not the case when it comes to money which has been lent to a business in the case of loans personally guaranteed by directors, an arrangement which in effect, signs away the protection usually afforded to Directors by their company’s Ltd status and makes them responsible for the debt of their business.
Why would Directors Give Personal Guarantees on Company Loans?
Funding is often essential for businesses, especially those just starting out. It’s commonplace for business lenders to seek a personal guarantees on company loans as a form of extra security which may also reduce the cost of the loan or in some cases may be the only way such funding can be obtained. For a business which is expected to be easily able to service the loan, the risk to the Director can seem notional or negligible at the time and as such the personal guarantee doesn’t seem much of an issue.
Unfortunately, in a world where trading conditions for businesses of all kinds has become less stable and even the largest and most established businesses are finding themselves struggling (and in some cases, failing) to survive, there are many Directors who’ve given such personal guarantees on company loans who’re finding that decision coming back to haunt them.
Personal Guarantees on Company Loans – What are the Implications?
Where Directors have given personal guarantees on company loans, they’ve effectively accepted liability for company debt should the company be unable to pay. This means that should the business fall on hard times and become insolvent, the lender can pursue the Director or Directors who’ve signed as guarantors for the remaining balance. Given the nature of company loans, the amounts involved are likely to be large and in such cases have the potential to put the Director’s savings and property at risk.
It’s also worth knowing that insolvency and liquidation aren’t always a necessity for lenders to pursue Directors who’ve given personal guarantees on company loans. It’s important to check the detail of the loan agreement as all will be different and some, for example, might stipulate that if the company misses so much as a payment, the Director assumes responsibility.
Additionally, if a Director steps down from a company for whatever reason, that doesn’t automatically cancel their liability to loans they’ve personally guaranteed and in many cases they will be able to be pursued for company debt until the loan they guaranteed is satisfied, so it’s important to be fully aware of the terms and conditions, if you’ve given such security.
What are the options for Directors who’ve given personal guarantees on company loans?
If you’re in the unfortunate situation of being held liable for the remaining debt of a business of which you’re currently, or have formerly been the Director, it’s important to seek help quickly. Because every business loan can have its own terms and conditions, each situation needs to be considered on its own merits and an analysis of the ‘fine print’ is required. Where personal guarantees on company loans has been given, it will need to be established to what extent the Director who’s given them is personally liable and what remedies may be available.
For businesses which are on the verge of insolvency, Directors who’ve accepted liability for such a loan are well advised to act fast. Missing a payment on a loan, becoming insolvent and entering liquidation may all see lenders triggering clauses where they can instantly call in a loan, making Directors responsible for the entire debt straight away and even if the company enters administration as a business rescue attempt, the Directors, having given personal guarantees are outside the ‘protective bubble’ shielding the company from legal action and are almost certain to be aggressively pursued. A director who’s been made bankrupt by the business loans they’ve personally guaranteed will find themselves being unable to continue to act as a director, so even if their business survives, they won’t be able to be in charge any more. Which will likely be a very bitter pill to swallow.
If you’re worried about the current or impending insolvency of a business for which you’ve personally guaranteed a loan, contact us today for a free consultation and we’ll use our decades of experiences to advise you on the best course of action based on you and your unique circumstances.
Speak to us, we can help.