What happens if I liquidate a company with a personal guarantee?

A personal guarantee is an official document that makes an individual liable for repaying a loan or other finance agreement if the company cannot afford to do so. It can be signed by one or more company directors to give the lender multiple avenues to ensure repayment. In some cases, it can even be secured against a director’s personal assets, including their home.

Personal guarantees can be useful for company directors, as they allow businesses without a sufficient credit history or balance sheet to access the finance they need to grow. However, a personal guarantee can become an understandable cause for concern if the business declines.

If your company has debts it cannot pay i.e. it’s insolvent, you should contact a licensed Insolvency Practitioner to explore your rescue options. But if the business is no longer viable, your best option may be to close it down via an insolvent liquidation.

When you enter liquidation, the liquidator will sell the company’s assets to raise money to repay the creditors. They pay the creditors as much as possible in a pre-determined order and any outstanding debts will be written off. That’s the benefit of limited liability protection.

However, if you have signed a personal guarantee for a debt, rather than being written off, liability for that debt will pass from the company to you. The lender will then be able to pursue you for the repayment. That could lead to you having to sell personal assets such as vehicles or property or even end in sequestration (the Scottish version of bankruptcy).

If a lender receives some or even none of the money they are owed when your company is liquidated, there are several routes they can take.

The first step is for the lender to write to you and formally demand the outstanding balance. Depending on the creditor and the value of the debt, they may be open to a repayment deal. They may ask that you take over the company’s monthly repayments or even give you flexibility to make lower payments over a longer period.

Another potential option is for the lender to offer you a lump sum settlement of a percentage of the full amount owed. If you cannot afford or agree to a repayment or settlement deal, the lender may look to take enforcement action through the court. A Sheriff Officer (bailiff) could visit your home and remove goods to the value of the debt.

Alternatively, they could place an inhibition order (a charging order in England and Wales) on your home. That would prevent you from selling or remortgaging your home until you have repaid the creditor. Sequestration is also possible but it should only be used as a last resort. It will result in the sale of your assets and severely impact your creditor rating for at least six years.

It’s not unheard of for a company director to negotiate their way out of a personal guarantee. You’re most likely to be successful if you start the negotiations when your business is in a healthy financial position. If your company is already struggling when you contact the lender, they are far less likely to be receptive.

These days, lenders take great care when drawing up guarantees to avoid any ambiguity or objections. However, it’s still worth asking a solicitor to check the wording of a guarantee and the terms and conditions for any flaws that could make it unenforceable.

Although it can be difficult to get out of a personal guarantee, it may be possible to negotiate an affordable repayment arrangement or pay a reduced sum in full. As long as you are honest about your resources and communicate with the lender openly, you should be able to reach an acceptable resolution.

At Scotland Liquidators, we have many years of experience liquidating companies with personal guarantees and can provide professional guidance on the best route forward. Contact our Insolvency Practitioners for a free, same-day consultation or arrange a meeting at one of our offices in Scotland.