Personal guarantees in insolvency

A personal guarantee (PG) is a separate contractual undertaking by a director — or other individual — to pay a company debt if the company defaults. Legally, it sits alongside the company's primary obligation:

• ›The company is the primary debtor — it owes the underlying debt.
• ›The director is the secondary debtor under the guarantee — liable if the company doesn't pay.
• ›Once the company defaults (typically on insolvency), the creditor can pursue the company and the director simultaneously.
• ›The guarantor's liability survives company insolvency — the company's discharge does not discharge the guarantee.

This is the critical point: company liquidation, administration, or dissolution does not extinguish a personal guarantee. The director remains personally liable to the creditor for the guaranteed debt.

Most SME directors have signed personal guarantees on one or more of: bank facilities (overdraft, term loan, asset finance, invoice discounting, commercial mortgage); commercial property leases (landlord PGs typically covering 6–12 months of rent, sometimes unlimited); larger suppliers extending substantial credit; hire purchase and equipment leasing; trade finance arrangements (import/export, factoring, supply chain); and some commercial utility deposits for large customers.

Notable exception: standard Bounce Back Loans issued under the COVID-19 scheme did not require personal guarantees — the 100% government guarantee to the lender substituted. Personal liability on BBLs arises only through misuse, misrepresentation, or strike-off avoidance. See Bounce Back Loan personal liability.

The guarantee becomes enforceable when:

• ›The company defaults on the underlying debt — typically by missing payments, breaching covenants, or entering insolvency.
• ›The creditor issues a formal demand on the guarantor — a 'letter of demand' specifying the amount, the underlying default, and a payment deadline (usually 7–21 days).
• ›Some guarantees are 'on-demand' — the creditor can call the guarantee at any time, even where the company has not formally defaulted.

Once demand is made, the guarantor must pay — or face legal action. Failure triggers the creditor's enforcement options: bankruptcy petition where the debt exceeds £5,000 (section 267(4) Insolvency Act 1986), County Court Judgment, charging order on the guarantor's property, attachment of earnings, or third-party debt order.

1. Pay the guarantee in full

If you have personal funds available, paying the guarantee removes the personal liability. The creditor releases you from the guarantee. Often the cleanest route — particularly where the guarantee amount is modest and the creditor is willing to settle for the principal without enforcement costs.

2. Negotiate a reduced settlement

Most PG creditors will accept a reduced settlement rather than pursue full enforcement. Typical PG settlements: 40–70% of the original debt. See Negotiating personal guarantees for the detailed framework.

3. Challenge the validity

Not all PGs are enforceable. Common defences include misrepresentation, duress, undue influence (particularly spouse/partner PGs), failure of independent legal advice, formality defects, and creditor breach of guarantor protections. See Unenforceable personal guarantees.

4. Individual Voluntary Arrangement (IVA)

Where multiple PGs are called and the director cannot pay them all, an IVA can compromise the debts collectively. The IVA is a formal arrangement under Part VIII Insolvency Act 1986 binding all unsecured creditors. Typical IVAs: 5-year duration, 25–50% recovery, supervised by an Insolvency Practitioner.

5. Personal bankruptcy

Where the PG liability cannot be settled, negotiated, or restructured, personal bankruptcy may be the inevitable outcome. Bankruptcy discharges most unsecured personal debts — typically after 12 months. Consequences: credit impairment, restrictions on directorship while undischarged (section 11 CDDA 1986). Bankruptcy itself does not disqualify under CDDA, but it prevents acting as director during the period.

• ›Don't ignore the demand letter — silence accelerates enforcement and removes negotiation leverage.
• ›Don't transfer assets to family members — this is a transaction at undervalue under section 339 Insolvency Act 1986 (the personal equivalent of s.238 for companies) and will be unwound in any subsequent bankruptcy.
• ›Don't pay favoured personal creditors ahead of the PG creditor — this is a personal preference under section 340 IA 1986.
• ›Don't take advice only from the PG creditor's solicitor — their interests are not aligned with yours. Independent advice is essential.

PG enforcement timelines are aggressive. From the demand letter:

• ›Day 0 — demand letter served.
• ›Day 7–21 — payment deadline.
• ›Day 30–60 — statutory demand or claim form issued.
• ›Day 60–120 — judgment obtained; enforcement begins (charging order, attachment of earnings, etc.).
• ›Day 120–180 — if bankruptcy threshold met, bankruptcy petition filed.

Engaging early gives access to all five options above. Engaging late narrows them sharply — settlement leverage decreases as enforcement progresses.

For the negotiation framework, see Negotiating personal guarantees. For the legal defences, see Unenforceable personal guarantees. For the company-level director duties framework, see Director duties in financial difficulty.