The benefit of trading through a limited company or limited liability partnership has been seriously eroded over the years.
It used to be just the banks that asked for personal guarantees, but over the years, requesting a personal guarantee has become common among suppliers.
More recently there are increasing numbers of lenders including Funding Circle, Iwoca, Capital on Tap, Capify and others who have joined the business lending market, and who will generally only lend with the benefit of a personal guarantee.
Removal of limited liability
This view is shared by Joss Dicks of Personal Guarantee, who said: “There has been an effective removal of limited liability, not because of any direct regulatory or legal impositions, but due to market shifts partly created by the 2008 banking crisis and consequential regulatory tightness enforced on mainstream banks.
“This has given rise to a plethora of secondary lenders to businesses providing finance on the basis of ‘personal guarantee only’ security. Much of this lending is unregulated and sometimes made without much due diligence of the financial situation of the borrowing company or for that matter the guarantor.
“Of course, if things don’t go well and there is any default by or insolvency of the Company, these lenders do not wait to see what meagre dividends come to them as an unsecured creditor; they direct their immediate energy on recovery directly from the guarantor(s).
“The sad part of this is some of this lending is to businesses who might have survived if they went through a proper restructuring process but are lured into borrowing money to save their business and then borrow even more from the same or similar lenders.
“This can lead the business into irrecoverable strife leaving the guarantor vulnerable to aggressive debt collection processes by potentially multiple personal guarantee creditors.”
Challenging Personal Guarantees
The scope for challenging personal guarantees has become limited over time as lenders and trade suppliers alike have improved their documentation and processes.
However, personal guarantees signed by non-involved persons in addition to situations where persons have been induced to sign a personal guarantee under a falsehood are just some examples of areas that can call the ability to enforce into question.
Bev and Joss advise: “It is utterly vital to properly assess the guarantor’s overall position to decide on the enforceability of such guarantees.”
Joss adds: “In dealing with over 2,000 personal guarantees, the knowledge we have gained provides an invaluable insight into collection processes and enforceability issues that pertain to individual organisations looking to enforce personal guarantees. More information on the work that we do can be found at www.personalguarantee.co.uk.”
Formal and Informal Options
If the number of personally guaranteed debts is limited, offering a full and final settlement can make sense if you can raise a lump sum.
Bev adds: “You need to be able to demonstrate that this maximises the recovery compared to a formal solution – bankruptcy or IVA – after factoring in the various costs of the procedures.
“However, where there are multiple guarantees plus other personal debts and there are assets to protect, and you want to continue to act as a director of a company, an IVA based on monthly contributions and or a lump sum becomes more appropriate.”
If your business is facing financial difficulties, it is vital that before agreeing to wind up your business, you seek personal advice on the implications for you.