Personal Guarantees-A Directors Story

Personal Guarantees-A Directors Story

In the current financial climate, with interest rates high, the number of company and individual insolvencies are increasing. According to the Company Insolvency Statistics for October to December 2023 published by The Insolvency Service, in 2023 there was a total of 25,158 registered company insolvencies, the highest number since 1993.

Furthermore, The Gazette stated in the UK individual insolvency statistics for the fourth quarter of 2023 that 1 in 461 individuals became insolvent in 2023; the rate in England and Wales alone was 21.7 per every 10,000 adults.

Personal Guarantees-A Directors Story

Figure 1: Source from The Insolvency Service – National Statistics Commentary – Company Insolvency Statistics October to December 2023.

During the last quarter of 2023 (from 1 October 2023 to 31 December 2023), the number of Company Insolvencies had risen by 14% compared to that of the last quarter of 2022. Over the course of these three months, there were a total of 6,788 company insolvencies, with the largest percentage of those being Creditor Voluntary Liquidations (CVLs).

Whilst CVAs and Company administrations may be an option for a company who could potentially have the opportunity to claw-back from insolvency, or provide a better outcome for creditors, a CVL can in some circumstances provide director’s, with a fresh start once liquidated.

In the BTI 2014 LLC v Sequana SA and others judgment in 2022, the court ruled that duty to creditors does exist at common law therefore, a company facing inevitable insolvency must prioritise the interests of its creditors rather than its shareholders. With creditors now at the forefront, it is more challenging for directors to balance the interests of shareholders and creditors without risking any allegations that they have breached the duty owed to creditors.

Liquidating an insolvent company is not always risk-free for directors when there are other factors in play, such as personal guarantees.

A Personal Guarantee (PG) is a promise to creditors that, should the company be unable to pay its debts, the guarantor will personally pay and satisfy those debts. Whilst Personal Guarantees from directors are often agreed to obtain finance or credit, they can prove to be challenging when a company is insolvent and can in some cases lead to the director’s personal insolvency.

Recently, a client of ours was faced with a difficult situation when their company was being liquidated. Our client was a director of a company and throughout a period of three years, whilst they held the position of director and shareholder, they entered into three different PG’s with three separate creditors to guarantee the debts owed by our client’s company to them. The creditors all called in their PG’s when the company went into liquidation.

Taking into consideration our client’s financial position at the time, we negotiated with the creditors. An offer which was significantly lower than the total debt was put forward to the creditors on the basis that it was more than the creditors would have received if our client had been declared bankrupt.

By pro-actively approaching the creditors with an alternative resolution to bankruptcy, we were successful in agreeing a settlement that meant our client avoided bankruptcy and the creditors recovered more than they would have had he been made bankrupt.

Whilst this settlement was not pain free, as our client had to re-mortgage his home and the creditors had to accept significantly less than the total sum owed, it did provide the best possible outcome, in the circumstances, for all parties and most importantly to our client he avoided bankruptcy.

If you are a director concerned about potential personal liabilities should your Company fail or, you are already being pursued in relation to debts you have guaranteed, please contact us for a confidential chat.

Stuart Love

01327 301771

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