Can’t Pay Your Personal Guarantee?

As a director of a business, it is almost certain that you will be asked to sign a personal guarantee (PG) on a business loan. A personal guarantee can be a good way to access finance that otherwise would not be available however, if circumstances change, you can be left personally exposed.

It is rare to consider the worst-case scenario when taking a business loan and even less likely that a lender will warn you of the consequences. Despite the serious implications of a personal guarantee, there are always commercial solutions available.

When Can a Personal Guarantee be Activated?

This depends entirely on the wording of your loan agreement but generally, a personal guarantee may be ‘triggered’ in the event of missed payments or any form of insolvency.

Often, if you miss a payment a lender will give you the opportunity to repay the arrears. However, they are under no obligation to do so. One missed payment will allow them to personally pursue you. In fact, some lenders can even start to pursue you if they think that you may miss payments due to signs of business failure.

Any insolvency action will automatically ‘trigger’ a guarantee on a loan. This can be anything from an attempt to dissolve a company to the appointment of administrators. Again, if a lender is under the belief that your company will enter liquidation, they may be able to begin proceedings against you personally.

What Happens if a Personal Guarantee is Called In?

 If this happens, you are personally liable for the debt. Your lender will send you a request for a payment in full, they will request the ‘crystalised’ amount (i.e. the final bill for what you owe). This is the amount they will pursue you for if you do not pay.

Usually from this point on, they will also add further interest, default charges and legal fees. So, your liability can continue increasing.

If you do not pay, your lender will begin legal proceedings against you. This mainly takes two forms:

1. Obtaining a judgment

This is a court order officially recognising your debt. After securing a judgement, the lender will apply for an Order Charging Land to be placed on your home or properties. This order means that if you ever sell the property that you must give a certain amount to the lender.

2. Statutory demand and bankruptcy

A statutory demand is a formal request to repay a debt. Unlike a judgement, it is not a legal document and does not require court action. However, it can be as, if not more, serious. A statutory demand is the first step to making you bankrupt. You can read more about the impact of bankruptcy here. If you have received a statutory demand as a result of a personal guarantee, you have 18-21 days to take action.

Regardless of the method, your personal finances as well as your home and assets become at risk. Your lender will look to recover money the easiest way, usually this is through your residential home but may also include investments or other properties.