Personal guarantees: what are the implications in insolvency?

form fillingKeith Steven looks at the implications of signing a personal guarantee.

Lenders, landlords and suppliers often ask for a personal guarantee (PG) before agreeing to a deal.

As the name suggests, you personally guarantee to pay the money back if your company can’t pay in the future. The aim of this is to reassure lenders that any losses will be covered, should your company become insolvent or unable to repay the debt in the future.

It’s important to consider a personal guarantee carefully and be aware of the implications before you sign. Here are some useful things to remember:

  • Not every lender will ask for a personal guarantee when you apply for a loan, or every landlord when you take on a property lease. However, many will include this in the contract, so it’s vital that you thoroughly check clauses for mention of PGs. If you know you are personally responsible, you can prepare for a worst-case scenario and plan accordingly.   
  • PGs are most commonly used when there is little recourse if things go wrong. For example, if you’re looking to hire equipment stock or a company car, you are renting the use of the machine or property, and therefore the provider wants to make sure they can get it back if the company runs out of money to pay.
  •  If your company becomes insolvent, or a lender is suspicious that there are financial problems, they may call in the PG, which you will personally have to pay back. It is not the company’s responsibility, as you personally guaranteed it, even though it was a loan or finance for the business. If the company no longer exists (ie is in liquidation), the debt is still valid, as you personally guaranteed it.
  • If you and a business partner, or spouse, jointly agree to a personal guarantee, but for whatever reason they are no longer around or cannot pay, you will have to pay back the whole debt, not just half of it.
  • It is possible to get out of a PG if the company is doing well by proposing better payment terms. A new agreement could benefit both parties.
  • If the PG is called in, because the company is experiencing financial trouble, there may still be a chance to negotiate. It’s worth looking into if there is any way you can pay the full amount back. Taking you to court to retrieve the money could be expensive, so it may be preferable to them to avoid that and consider a new deal.

If a PG has been called upon, and there’s no way you can pay it back yourself, you should seek legal advice and consider personal insolvency procedures, such as an individual voluntary arrangement (IVA) or bankruptcy. These may seem extreme, but they could be the best options for you and your business in the long run.

About the author

Keith Steven of KSA Group Ltd has been rescuing and turning around companies since 1994. He has worked for insolvency firms, turnaround funds and venture capital investors and is the author of