A personal guarantee is a written contract which sets out the acceptance of responsibility, by the guarantor, to satisfy their obligations to a third party in the case of a default. Often personal guarantees are accepted by company directors to acquire funding for their business when they have poor credit, however this ceases their limited liability and makes them personally responsible for any outstanding debt.
As the rate of insolvencies increases from the current historic lows, we expect to see more Directors facing the risk of personal liability for their pandemic debts. Especially if pursued by creditors who hold a personal guarantee over the company. The following are methods which directors can follow to reduce their liability under a personal guarantee:
Keep a List
It is crucial for directors to keep adequate records, especially in the case of personal guarantees. If you need to seek financial assistance in the future, being unable to determine which creditors hold guarantees over you can hinder the process.
Understand the Contract
Ensure that you take time to understand all aspects of the contract and any included terms and agreements before signing. Negotiate until you are satisfied, it is also a sound idea to place a firm limit on any personal guarantee you provide.
Seek Legal Advice
Should your guarantee be called upon, it is important to seek legal advice immediately to break down the terms of the contract and ensure that they are indeed enforceable. If the guarantee is shown to be valid, you can also attempt to reduce your total liability by negotiating with the creditor.
Yes, personal guarantee insurance does exist and can help you to protect your assets. While the level of cover varies, it may be a valuable service in the event your personal guarantees are enforced. You can check out Personal Guarantee Insurance here.
Evaluate Your Financial Position
If you’re struggling with personal guarantees or want to know more about how they can impact you if enforced. Feel free to contact us, we can discuss the overall health of your business as well as provide clarity to any exposure you may be facing from personal guarantees.