Personal guarantees and liquidation: what survives

When a company is liquidated, its debts are extinguished with it. A personal guarantee is not the company’s debt. It is yours, and it survives.

What survives and what does not

Extinguished with the company: every debt the company owed in its own name. Trade creditors, HMRC, the Bounce Back Loan, unsecured bank lending without a guarantee. Once the liquidation closes, these cannot be pursued against anyone.

Survives: any debt you personally guaranteed, up to the amount and terms of the guarantee, less whatever the lender recovers in the liquidation. Also surviving, though not guarantees, are the directors’ loan account (owed by you to the company) and any claims the liquidator brings against you.

Where guarantees usually hide

Directors often know about the big one, the bank overdraft or term loan, and have forgotten the rest. Check:

• Bank facilities: overdraft, loan, credit card, merchant services.
• Asset finance and hire purchase on vehicles and equipment.
• Invoice finance and factoring agreements, which nearly always include one.
• The commercial lease, where the landlord required a director’s guarantee.
• Trade credit accounts with builders’ merchants, wholesalers and fuel card providers, which bury a guarantee in the account application.
• Any facility from a Coronavirus Business Interruption Loan above £250,000, where lenders could take guarantees. Bounce Back Loans never carried one.

Ask each lender for a copy of the guarantee document. You are entitled to it.

What the lender does

On the company’s default or liquidation, the lender makes written demand on you under the guarantee. If you do not pay, a letter before action follows, then a county court claim, then judgment, then enforcement: a charging order over your home, an attachment of earnings, or in the last resort a bankruptcy petition if the debt exceeds £5,000. The sequence can run inside three months.

The amount is what the company owed at the date of demand plus contractual interest and costs, capped by any limit in the guarantee, and reduced by whatever the lender recovers from the liquidation. A lender with security over company assets must usually realise that security first.

Where there is room

Lenders settle guarantees. They would rather have a certain sum now than an uncertain one after litigation and, possibly, your bankruptcy, from which they might recover little. Realistic offers, made early and backed by a statement of means, are often accepted at a discount, particularly where several lenders are in the queue and each can see that the first to settle does best.

Check the document too. Guarantees have been defeated or reduced where the facility was varied after signing without the guarantor’s consent, where the guarantor was not advised to take independent legal advice and the lender knew they were vulnerable to pressure, where the guarantee was not properly executed or witnessed, or where the lender’s demand exceeds a cap. A solicitor’s review costs a few hundred pounds and is worth it on any guarantee over £20,000.

Where several guarantees are called at once and the total exceeds what you could ever pay, an individual voluntary arrangement can deal with all of them together and protect your home, if the figures justify it. A licensed practitioner handles these as well as company liquidations, which is one reason to have the guarantee conversation with them before the company is liquidated.

The sequence that works

Know every guarantee before the company enters liquidation. Tell the practitioner. Do not pay a guaranteed creditor from company funds ahead of the others in the hope of reducing your exposure, which is a preference and will be reversed. Once the liquidation is under way, respond to each lender’s demand in writing, ask for the guarantee document and account history, make a realistic offer, and take advice before agreeing anything.

What to do today

1. List every facility and account the company has and check each for a guarantee.
2. Request a copy of every guarantee document from the lender.
3. Prepare a statement of your personal assets, income and debts. Every negotiation will need it.
4. Speak to a licensed insolvency practitioner about the company and the guarantees together.