If you have signed a personal guarantee and your business is now struggling, you are not alone. Many directors and business owners in England and Wales are asked to give personal guarantees when taking out loans, overdrafts or commercial leases. When a company runs into financial difficulty, those guarantees can suddenly become very real.
Signing a personal guarantee does not automatically mean you have done anything wrong. It does mean that the creditor may now look to you personally if the company cannot repay the debt. There are recognised legal steps that lenders must follow before enforcing a guarantee, and there are often options available to manage the situation and protect your position.
In many cases, the issue arises after a company has defaulted on a loan or entered insolvency. Understanding what happens next can help you decide how best to respond.
What is a personal guarantee and why am I personally liable?
A personal guarantee is a legally binding promise that you will repay a company’s debt if the company cannot do so itself. Banks, asset finance providers, landlords and other commercial lenders frequently require directors to sign guarantees when lending to smaller companies.
- Normally, operating through a limited company protects directors from personal liability.
- However, a personal guarantee sits outside that protection.
- If the company defaults on its obligations, the creditor can pursue the individual guarantor for payment.
Some guarantees are limited to a fixed amount, while others are unlimited and cover interest, costs and enforcement fees. Many also include indemnity wording which gives the creditor wider recovery rights.
Because of this, the precise wording of the guarantee is important. A careful review of the guarantee and the underlying loan documentation is often the first step in assessing how exposed you may be.
What happens if I miss payments under a personal guarantee?
If the company defaults and the creditor decides to enforce the guarantee, you will usually receive a formal demand asking you to repay the outstanding balance.
If payment is not made, the creditor may escalate the matter. Often this begins with a letter before action explaining that legal proceedings will follow if the debt remains unpaid. Some lenders then issue a claim in the County Court seeking a money judgment against the guarantor.
In other situations, particularly where the debt is large or the creditor believes recovery may be difficult, they may serve a statutory demand. This route can increase pressure on the guarantor and may lead to insolvency proceedings if the debt remains unresolved.
Which route a creditor chooses often depends on the amount owed, the wording of the guarantee and what they understand about the guarantor’s financial position.
Can I receive a statutory demand or bankruptcy petition?
Yes. If a personal guarantee debt remains unpaid, a creditor may serve a statutory demand on the guarantor personally.
- A statutory demand is a formal insolvency document requiring payment within 21 days.
- If the debt is not paid or challenged within that period, the creditor may present a bankruptcy petition to the court.
Bankruptcy has serious consequences.
- Once a bankruptcy order is made, control of the individual’s assets passes to a trustee in bankruptcy.
- The trustee’s role is to investigate the debtor’s financial affairs and realise assets for the benefit of creditors.
- This can include a person’s interest in property, including their share of the matrimonial family home. Bankruptcy also prevents an individual from acting as a company director while the order remains in force.
However, receiving a statutory demand does not automatically mean bankruptcy will follow. In many situations the demand can be challenged or the dispute resolved before the court is asked to make a bankruptcy order.
Are there any defences to a personal guarantee claim?
Whether a defence exists depends on the specific wording of the guarantee and the circumstances in which it was signed.
Some guarantees are drafted very broadly, while others contain limitations that restrict how they can be enforced. It is therefore important to review the documentation carefully before assuming the creditor’s claim is valid.
For example, issues sometimes arise where
- the guarantee was not properly executed,
- where the underlying loan terms were varied without the guarantor’s consent, or
- where the creditor has calculated the debt incorrectly.
Even where a technical defence may not exist, negotiation is often possible. Creditors may be willing to consider structured repayment arrangements or settlement proposals if it increases the likelihood of recovering the debt.
If the company itself has entered insolvency, it is also sensible to consider the wider legal picture. Personal guarantee liability can sometimes overlap with other issues affecting directors once a business becomes insolvent.
What should I do now to protect yourself?
The most important step is not to ignore the situation. Personal guarantee enforcement can escalate quickly, particularly if formal legal documents have already been served.
Start by gathering the relevant paperwork. This should include the signed personal guarantee, the original loan or facility agreement and any later variations to those arrangements. These documents determine the scope of the creditor’s rights.
It is also sensible to obtain advice before responding to the creditor. Early advice can help identify whether the guarantee can be challenged, whether negotiation is possible or whether a wider insolvency strategy needs to be considered.
Where the company is already insolvent, the advice may also need to address the director’s position and whether additional legal risks could arise later.
Acting early usually provides the greatest flexibility and helps prevent the situation becoming unnecessarily more serious.
Taking advice on personal guarantee enforcement
Personal guarantees are a common feature of business lending in England and Wales. When a company fails or struggles financially, those guarantees can expose directors and business owners to personal claims.
Understanding how lenders enforce guarantees, and what options may be available in response, is an important first step in protecting your position.
If you are facing enforcement under a personal guarantee, obtaining early legal advice can help clarify your options and avoid matters escalating unnecessarily.
