Enforcement of Personal Guarantees During the Time of Covid-19

14 May, 2020 | Duncan Lang

Covid-19 has had a huge impact on businesses both big and small, and we expect to see an increase in the number of company liquidations for months to come. When a company is put into liquidation, or a director ceases to act, liability under a personal guarantee continues.

If a company owes you money, and is not paying, you should review the original contract for services to determine whether a personal guarantee is in place.

If your own company is at risk of liquidation, review your contracts with creditors to determine whether you have provided any personal guarantees that could generate risk for you.

Personal guarantees are common business practice. Suppliers often require them when providing goods or services in advance of payment, particularly when contracting with small and medium sized businesses. They are often required when leasing a business premises.

Liability of a Director/Guarantor

Director’s and shareholder’s assets are usually separate from the business, so when a registered company fails, creditors are limited to recovery of the company’s assets. However, a personal guarantee provides that the guarantor personally assumes the obligations of the company. If the company fails to perform or pay, creditors can pursue the guarantor’s personal assets as well as, or instead of, just the company’s assets. Crucially, there is no obligation for the guaranteed party to make a claim against the company before pursuing the individual guarantor(s).

If there is more than one guarantor, liability is usually joint and several. This means that the guaranteed party can choose to pursue any one guarantor for the full amount outstanding, or all together. If only one guarantor is pursued, that guarantor would have to seek contribution from the others.

A guarantor may also be liable for additional costs, including interest charges and legal costs.

Enforcing a personal guarantee

The first step in enforcing a personal guarantee is to demand payment from the guarantor – this could be full payment, a payment plan, or recovery of collateral.

If this does not result in satisfactory payment, the next step is to commence legal proceedings against the guarantor for payment of the company’s debts by way of a summary judgment application (a faster-track process for contractual matters where this is no arguable defence).

If judgment is received but the guarantor still does not pay, the guaranteed party can take steps to enforce the judgment, which may include seizing and auctioning the guarantor’s personal property, registering a charging order over any land owned by the guarantor personally (rather than by a trust), and/or taking steps to bankrupt the guarantor.

Defending a Personal Guarantee

Guarantees must be in writing and must be signed. If these requirements are met, and the guarantor has expressed an intention to be bound by the guarantee, it will generally be enforceable even where minor deficiencies exist.

Nevertheless, it is important to consider surrounding circumstances and the precise language of the guarantee to determine its applicability/validity and the extent of the guarantor’s liability.

If you are considering providing a personal guarantee we can help you with strategies to protect your assets in the event that things go wrong, and the guarantee is called up by a creditor. This can include making sure that assets are held in a trust well in advance to ensure that things assets like a family home are protected.

Contact us to discuss

For advice specific to your situation, please contact our Litigation experts to set up an appointment.