Implications for company directors of personal guarantees

The current crisis is putting many businesses’ cash flow under pressure. In many cases, company liabilities have been deferred and may be left unpaid if the company is forced to go out of business. Company directors need to consider their personal exposure to company creditors through previously agreed personal guarantees.

A personal guarantee is a legal undertaking by an individual to repay another person’s debt. When directors seek funding for their business and sign a personal guarantee, it is a legally binding waiver that bypasses the limited liability status of a limited company during debt recovery.

In essence, a personal guarantee agreement holds the director personally liable if the business is unable to repay money owed. There are many reasons why a director might be willing to provide personal guarantees in support of a business loan, property lease or line of credit. The individual providing these guarantees will typically have assumed that the creditor would never have any cause to call on the guarantee in a manner that affects their personal assets.

Typical areas where liabilities might be personally guaranteed are:

• Bank loans and overdrafts
• Finance leases on equipment and motor vehicles
• The lease of the premises
• Invoice discounting facilities
• Supplier credit application forms

In the current climate, we are likely to see many instances of personal guarantors being called on to satisfy company debts. In difficult circumstances, this will inevitably lead creditors to seek court approval for mandated and priority claims on the guarantor or their personal property and income.

In seeking to recover sums under a personal guarantee, the creditor must:

1. Secure a judgment on foot of the terms of the personal guarantee; and then
2. Enforce that judgment against the assets of the guarantor. 

The methods by which judgments may be enforced include the following:

• Power of the Sheriff: Applications may be made to the Sheriff to seize the guarantor’s moveable goods, subject to certain limitations
• Garnishee proceedings: The court has the power to order a third party to pay lenders directly the debt which that third party owes to the guarantor
• Instalment order: Lenders apply to have the means of guarantors examined by the District Court and an order made for periodic payments in a lender’s favour
• Judgment mortgage: If the guarantor has property or land it may be possible to secure judgments by attaching judgment mortgages to property
• Receivership: A receiver may be appointed over some of the assets or over future income where judgment mortgage has been secured
• Bankruptcy: Lenders may issue bankruptcy proceedings to have guarantors declared bankrupt

Reducing personal guarantee exposure

Company directors should, as part of their assessment of ongoing business plans, review the extent of potential personal liability that currently exists. Personal guarantees may have been entered into when the business was in a positive trading environment, but circumstances have now changed and some businesses are under pressure to obtain additional working capital headroom. Taking on new loans and extended credit from sources that are personally guaranteed needs careful analysis and consideration as to broader implications for the directors should a turnaround in the business not materialise.

Directors should consider alternatives such as contracting the business size, negotiating settlements to reduce guarantee exposure levels and managing down these liabilities as part of any broader strategy. Negotiating arrangements with creditors can be difficult but it is usually a cheaper solution.

What happens on default of payment?

Once a company has defaulted on the payment of a loan or debt, and is no longer in a position to discharge same, the creditor will usually issue a demand letter to the guarantor on foot of the specific terms of the personal guarantee. The demand letter will seek repayment of the outstanding sums due and, if provided for under the guarantee, interest as well.

If a creditor writes claiming an entitlement to collect under a personal guarantee, it is important to check the wording in your facility agreement very carefully to ensure the terms match what you signed. It is also advisable to take legal advice and bring any correspondence from the creditor, or their solicitor, to your solicitor. If you are approaching insolvency and have a guarantee in place, your chances of negotiating leniency around this would be strongly improved by prompt action.

In circumstances where the guarantor does not pay the debt, the lender may institute legal proceedings against the guarantor, which can fall under different courts depending on the size of the claim:

• The District Court for sums up to €6,350
• The Circuit Court for sums up to €38,092
• The High Court for sums in excess of €38,092

A risk for the guarantor in allowing a creditor to attain a judgment and utilise the different collection methods is that the costs of the legal process and ongoing interest will be added to the sum due, thus further increasing the liability to be paid.

Need advice?

If your business is experiencing financial difficulties and you are worried about a personal guarantee made against company debts, please get in touch with the insolvency team at Crowe. We provide a free, confidential and no-obligation consultation to help you understand your options.