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Banks and personal guarantees

Banks and personal guarantees


If the company is unable to pay its debts that supplier or lender can pursue the directors personally for repayment of the debt.  In some cases this may result in bankruptcy proceedings being brought against the directors so it can be serious.


When a company is facing financial problems and the directors first come to me for advice, one of the questions they understandably want answered is how they will personally be affected if the company is placed into liquidation or administration.

One of the questions I will ask is whether or not they have given a personal guarantee to any suppliers or lenders in connection with the company’s liabilities.

If the company is unable to pay its debts that supplier or lender can pursue the directors personally for repayment of the debt.  In some cases this may result in bankruptcy proceedings being brought against the directors so it can be serious.

When I ask directors if they have given any guarantees quite often they will look at me blankly and ask us what a personal guarantee is.  Those that have the vacant look when guarantees are mentioned will usually claim they have not given any and I will recommend they check this, particularly with the bank.  This can result in a panicked call from the director telling us it turns out they have given a guarantee and now have an added problem to deal with.

The usual suspects who will obtain PGs from directors are its bankers, landlords and some trade suppliers.

More often than not the company’s bank will have obtained security over the company’s assets by way of a fixed or floating charge, like a mortgage.  If there are insufficient assets to cover its indebtedness then the bank will often ask the directors for a personal guarantee for added comfort that it will be able to recover its debt if things go wrong.

Sometimes it makes sense to give a guarantee as it might be all that is needed for the bank to be able to say, increase the overdraft facility, and give the company enough time to sort out its affairs.

On the other hand I have seen how guarantees can cause major difficulties for directors when things go wrong and a company becomes insolvent.  First of all they have a conflict as they owe a duty of care to the company and its creditors in their capacity as directors but will put off instructing me to put the company into liquidation or administration because they do not want their guarantee being called in by the creditor. 

Other times directors will use the company’s money to pay back the bank or third party to extinguish the debt and prevent their guarantee from being called in but the Insolvency Act 1986 specifically calls for this to be investigated as a possible issue. If the company was insolvent at the time the repayment was made it could amount to a preference and the director will have to pay the money back to the company, which is not what they want to hear.



David Kirk ACA FABRP

David Kirk

David Kirk is a Chartered Accountant and Licensed Insolvency Practitioner.
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