If you have personally guaranteed a company loan, overdraft, lease, finance agreement or supplier account, liquidation does not usually make that guarantee disappear.

The amount you could be liable for depends on the wording of the guarantee, the outstanding debt, any security held by the creditor and what they recover from the company.

This guide explains what happens to personal guarantees during liquidation, whether a guarantee can be challenged or negotiated, what information directors should gather and what options may be available if the debt cannot be afforded.

Personal Guarantees and Company Liquidation

A limited company is a separate legal entity, but a personal guarantee can make a director, shareholder or other individual personally responsible for a particular company debt.

If the company enters liquidation, the guarantee does not normally disappear. The lender, landlord or supplier may be entitled to pursue the guarantor for the amount covered by the document, subject to its wording and any defences available.

The important first step is to identify every guarantee and understand the likely shortfall. DCA Business Recovery can consider personal guarantees alongside the company’s wider position and explain how a proposed Creditors’ Voluntary Liquidation, administration or rescue plan may affect them.

What is a personal guarantee?

A personal guarantee is a contractual promise to pay if the company does not meet a specified obligation. Guarantees are commonly requested for:

• bank loans and overdrafts;
• asset finance and hire purchase;
• commercial leases;
• invoice finance facilities;
• trade-credit accounts;
• merchant or payment services;
• utilities; and
• other business borrowing.

The liability depends on the actual document. Some guarantees cover a single facility up to a stated limit. Others are continuing or “all monies” guarantees and can cover interest, fees and enforcement costs as well as the original borrowing.

Do not rely on memory or on what was said when the facility was arranged. Obtain a complete signed copy and any later variations.

What happens when the company enters liquidation?

The creditor will usually calculate what it expects to recover from the company and then consider the guarantee for any shortfall. It may demand payment immediately or after company assets have been realised, depending on the terms.

Liquidation itself does not automatically make the guarantor bankrupt or result in the loss of their home. It creates a personal claim that must be assessed and dealt with.

A lender may also hold security over company assets. The order in which it enforces company security and the guarantee can affect the final balance, so request a written breakdown.

Are Bounce Back Loans personally guaranteed?

Under the original Bounce Back Loan Scheme, lenders were not permitted to take personal guarantees. That does not mean every other loan, refinancing arrangement or separate facility with the same lender is unsecured personally.

Directors should check the exact agreements rather than assume all borrowing described informally as “COVID finance” has the same terms. Misuse of loan funds and the existence of a personal guarantee are also separate issues.

Can the guarantee be challenged?

Possible issues can include whether the guarantee was signed, properly incorporated, later varied or supported by the necessary formalities. There may also be questions about misrepresentation, undue influence or the creditor’s conduct.

These are legal matters and the outcome is highly fact-specific. An insolvency practitioner cannot simply declare a guarantee invalid. Where there is a genuine concern, obtain advice from a solicitor experienced in guarantee disputes before admitting the debt or agreeing a settlement.

Should I pay the guaranteed creditor before liquidation?

Be careful. Paying a creditor because you have a personal guarantee may reduce your own exposure, but it could place that creditor in a better position than others while the company is insolvent.

A liquidator can review payments and transactions made before liquidation. Directors’ duties also shift towards protecting creditors once insolvency is likely.

Do not use remaining company funds to clear a guaranteed debt without specific advice. The company’s payment and your personal settlement are different decisions.

Can a personal guarantee be negotiated?

Many creditors will consider a realistic proposal, particularly where immediate payment is not possible. A negotiation may involve:

• time to pay;
• a reduced lump-sum settlement;
• affordable instalments;
• refinancing from a personal source; or
• waiting until the company’s asset realisations establish the final shortfall.

Whether a creditor agrees depends on the guarantee, security position, affordability and likely recovery through enforcement. Any settlement should be recorded in writing and clearly state whether it releases the guarantor from all further liability.

What information should I gather?

Prepare a schedule showing:

• the creditor and facility;
• the outstanding company balance;
• the guarantee limit, if any;
• company security held;
• whether a formal demand has been received;
• any co-guarantors; and
• your available personal income, assets and liabilities.

Also check leases, supplier applications and finance documents. Guarantees are sometimes contained within standard terms rather than a separate document.

What if I cannot afford the guarantee?

There may be personal debt options ranging from an informal arrangement to an Individual Voluntary Arrangement or bankruptcy. The correct route depends on the full personal position, including the home, income, other debts and any disputed liability.

Do not transfer personal assets or favour family members in anticipation of a demand. That can make matters worse. Take regulated personal insolvency or legal advice before acting.

The company may also owe you money or have an overdrawn director’s loan account in your name. These balances need to be considered separately rather than netted off informally.

Can a CVA or administration protect the guarantor?

A Company Voluntary Arrangement binds the company’s affected creditors if approved, but it does not normally release a separate personal guarantee unless the creditor expressly agrees.

Administration may give the company breathing space and improve the business or asset outcome. Again, the guarantee needs to be checked separately. A successful company rescue can reduce the shortfall, but it does not automatically cancel the contract.

Discuss the company and personal exposure together

Directors often focus first on keeping the business running and only discover the extent of their guarantees when a demand arrives. Bringing the documents to an early meeting allows the company option and the personal risk to be considered side by side.

DCA offers a free initial discussion in plain English and without pressure. Contact us to talk through the company’s debts, the likely insolvency options and the guarantees that may be affected.

Frequently asked questions

Does limited liability protect me from a personal guarantee?

No. Limited liability generally protects shareholders from company debts, but a personal guarantee is a separate contractual commitment.

Is my spouse liable for a guarantee I signed?

Not simply because you are married. Liability depends on who signed and the ownership or security arrangements. Jointly owned assets may still be relevant to enforcement or personal insolvency advice.

Can a creditor pursue me before the liquidation finishes?

Potentially, depending on the wording of the guarantee. Some creditors do not need to wait for the final dividend before making a demand.

Will liquidation remove interest and legal costs under the guarantee?

Not necessarily. Many guarantees cover contractual interest and enforcement costs. Ask the creditor for a detailed calculation and have the document reviewed if the amount is disputed.