Last updated: 18 Nov 2024 09:00 Posted in: AIA
Marco Piacquadio examines the factors involved in supporting a client considering a personal guarantee.
Navigating the intricacies of personal guarantees can be a critical aspect of safeguarding your client’s financial interests. To help your client make the serious decision about whether to sign, it is essential that you are equipped with the knowledge to recognise the terms that could be problematic for them, especially from an insolvency perspective.
There are a number of steps you can take which will limit the liability of your client when accepting a personal guarantee.
Capping the guarantee: Rather than accepting an open-ended personal guarantee, it is wise to try to negotiate a limit on the amount for which your client can be held responsible. This limit could be established as either a predetermined sum or as a portion of the total outstanding debt.
Incorporating a release clause: It is advisable to stipulate a release clause in the guarantee that would absolve the guarantor of their obligations upon the fulfilment of certain criteria, such as the achievement of designated financial milestones by the company.
Limiting the scope of the guarantee: You can aim to confine the guarantee’s coverage to particular debts or commitments, as opposed to an all-encompassing guarantee.
Setting a guarantee expiry: It might be possible to add a clear expiration date for the personal guarantee that, once reached, makes the guarantee null and void. This establishes a predefined end to your client’s financial exposure.
Consent for modifications: Ensure the inclusion of a provision in the guarantee that requires your client’s explicit approval before any amendments can be made to the terms of the credit agreement or the guarantee itself.
When to advise against a personal guarantee
Although lenders and creditors commonly require personal guarantees, there are circumstances when advising your client against such an agreement is the best advice you can give. For example:
If one or more of these factors is present in your client’s situation, there is a higher risk that the company will encounter financial difficulties or fail to meet its obligations.
In this instance, as the personal guarantor, your client can be held personally liable for the debt. The result of this could be bankruptcy, leading to the sale of your client’s home and other valuable assets, seizure of personal bank accounts and possibly a claim on future earnings.
Personal guarantees and company insolvencies
When a company becomes insolvent or enters a formal insolvency process, any personal guarantees signed by directors or other individuals are likely to be enforced by the lender.
Creditors can pursue the guarantor for the repayment of the debt even after the company’s debts have been dealt with through an insolvency process. This is why it is worth considering the implications with your client before they sign a personal guarantee.
Personal bankruptcy could provide some relief, as a bankruptcy effectively freezes the personal obligation to pay back debts. However, a bankruptcy will involve the sale of your client’s assets to be able to pay the frozen personal guarantee debt which can have devastating personal financial consequences which will impact the guarantor for years.
Going forwards
The complexity of personal guarantees and the gravity of their implications cannot be understated. The objective for accountants is clear: ensure that when directors are pursuing viable business ventures, they are safeguarding their financial future in the process.
If your client is concerned about taking on a personal guarantee to keep their business afloat, or about one they already have, it is essential to guide them through the risk management and financial planning that goes with it.
For further information about your client’s, you can contact us at: enquiries@fasimms.com
Author biography
Marco Piacquadio is Director at FTS Recovery and FA Simms.
