Is it possible to renegotiate personal guarantees as part of a business rescue?

What is a personal guarantee?

Personal guarantees are legally binding waivers used by lenders to protect themselves when providing a loan. Lenders request personal guarantees in order to reduce the risk of providing a loan and, for business owners, this is sometimes the only way they are able to borrow. This can put company directors’ personal assets at risk, as they become liable for the debt that is taken on and covered by the guarantee.

What are the options when you cannot afford your personal guarantee?

If a business is profitable, it is easy to assume that a personal guarantee will never be called upon. However, insolvency may be more likely than you think, which can quickly mean that your personal belongings are at risk and your business is threatened with liquidation.

So, what are your options?

1) Negotiate with your lender

It is always advisable to seek professional help before entering into negotiations. In this case, there are two especially good reasons for this: firstly, it will show that you are taking the situation seriously and are legitimately interested in a coming to a resolution, and secondly, they may take more kindly to having discussions with an industry professional.

Your lender may be willing to negotiate settlement of the personal guarantee or come to some agreement about extended payment terms. When hoping for the latter outcome, it is important that evidence and a detailed plan is provided to back-up your proposed repayment schedule.

2) Company Voluntary Arrangement

If your business is still viable, a Company Voluntary Arrangement (CVA) would allow you to keep control as a company director and combine your debts into one affordable payment. Interest and charges would no longer be added, and all creditor action would be halted.

3) Alternative Funding

Traditional forms of finance can often be less flexible than alternative options. These alternative options include asset-based lending, peer-to-peer lending, and invoice finance. Obtaining regular injections of cash/capital may enough to prevent your creditor needing to utilise your personal guarantee, though eligibility for each form of alternative funding depends on the type of business you own.

4) Insurance

Personal guarantee insurance can be useful; however, they normally do not cover the entire amount of guarantee. The level of cover can depend on whether your personal guarantee is against a secured or unsecured loan.

5) Employ a turnaround strategy before it's too late

Restoring company performance and avoiding your personal guarantee being called upon requires a realistic turnaround strategy. It is possible to avoid having your personal assets on the line, as well as facing insolvency, liquidation and administration, providing that experts are consulted who will ensure the long-term viability of your company.

Some other escape routes

There are a number of factors to consider when assessing your level of liability under a person guarantee. Here is a list of some of those factors, which may be worth looking into and using as a defence if you feel they apply to your situation:

• Equity. If the governing principles of a personal guarantee are breached by the principal, it can leave them with no claim against the guarantor.

• Personal guarantees must be in writing. The Statute of Frauds 1677 requires that certain types of contracts must be in writing and signed.

• A change in circumstances. A personal guarantee can be considered to be released if circumstances surrounding the guarantee no longer support its existence.

• Misrepresentation. The guarantor is automatically released for the guarantee if caused to enter into it due to misrepresentation that the principal was aware of.

• Coercion. It is recognised by courts that personal guarantees may only have been entered into due to coercion and/or unfair pressure.

Obtaining professional advice before trying to get out of a personal guarantee is of vital importance. It is a hugely complex area in and of itself, with hidden negotiation tactics making it even more difficult to navigate.

Call Corelco on 0203 773 1417 for business rescue advice.