Personal Guarantees: What Do They Add?

15-10-26-shimon-keene-clarity-about-confusionUnlike some of our competitors, every single loan we list on our platform is backed by at least a Personal Guarantee (PG). Here, we will look at a few common questions about Personal Guarantees.

What is a Personal Guarantee?

In the simplest form, a Personal Guarantee is a guarantee under which an individual agrees to be responsible for the financial obligations of a borrower or debtor to a lender, in the event that the borrower or debtor fails to pay an amount owed to the lender.

Why do we use PGs on every loan?

We want to present you, as our lenders, with the best possible lending opportunities. In order to do this, we ask each Director of the companies we list on the platform to offer a Personal Guarantee in support of their application.

Firstly, this forces each Director to effectively ‘put their money where their mouth is’. We ask them to demonstrate their confidence in their business and their lending proposition by offering their personal financial resources as additional cover should the loan default.

Furthermore, as discussed in a previous post in this series, a key concept of limited companies is the limited liability entailed. This means that Directors are only legally responsible for the debts of their company to the extent of the nominal value of their shares. A Personal Guarantee creates a personal liability for the full loan amount upon each individual guarantor. Crucially, this provides a ‘secondary avenue’ to pursue the amount owed, distinct from the company itself. This can often be a useful avenue when action against the business is not possible, such as if a business exits administration through liquidation with no dividend expected for creditors.

The presence of a PG can also prove useful in situations where the business is still trading, and even in before a loan is even in default.

A Personal Guarantee carries with it the potential of Bankruptcy Proceedings should a Guarantor be unable to repay the debt. Bankruptcy carries restrictions and penalties, which include (among others) acting as a director, setting up or running a company or taking credit above £500.00. In addition, there are a large number of bankruptcy offences which, if convicted of, constitute criminal offences which can be punished by a maximum of 7 years in prison.

The potential penalty of bankruptcy can often form a powerful negotiating tool, and work to steady the mind of a director to prioritise making repayment arrangements in order to avoid the prospect of bankruptcy. This gives our collections team a powerful negotiating tool available on day one of a repayment being late.

Should a loan begin to perform poorly, the existence of a PG can also result in the establishment of a more favourable repayment agreement due to the Guarantor being likely to concede more in order to avoid further legal action and bankruptcy.

How do we enforce a Personal Guarantee?

When a debt is enforced against a Guarantor, they will initially be personally served with a Statutory Demand for the claimed debt. From service, a debtor has 21 days to either settle the debt in full or propose an acceptable repayment schedule. A failure to do this will lead to the commencement of county court proceedings or the presenting of petitions for a Guarantor’s bankruptcy.

Once a Bankruptcy Hearing date has been set, a Debtor has a further opportunity to come to a repayment arrangement (which may involve the submission of an Individual Voluntary Arrangement). Our legal agents attend the hearing on behalf of lenders and will usually petition the court to make a bankruptcy order.

After a Debtor has been declared bankrupt, if the court has appointed one, their estate will vest in a Bankruptcy Trustee, or if not, the Official Receiver. Our legal agents liaise closely with the court, the Bankruptcy Trustee and Insolvency Practitioners during the bankruptcy process in order to secure a dividend for lenders. The bankrupt’s estate is reviewed, the nature of the assets are determined and eventually their estate is liquidated to secure a recovery dividend for the bankrupt’s personal creditors.

Along with the financial dividend paid from the bankrupt estate to creditors, the bankrupt’s conduct is reviewed by the Official Receiver, who investigates and if it is deemed that the Bankrupt has committed any bankruptcy offences, then the court may make the appropriate bankruptcy restriction orders to extend the usual bankruptcy penalties or seek a custodial sentence.

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