Updated: 22nd February 2020
Company directors can feel under enormous pressure from lenders if their company defaults on loan repayments. Threats of legal action often ensue, including County Court Judgements (CCJs), the seizure of goods, and potentially a winding-up petition.
But the pressure on directors often starts even before a loan is granted. Increasingly these days, lenders are demanding that directors provide personal guarantees for company borrowing, leaving them at potential risk of personal bankruptcy if the company declines.
Another factor to consider is that, should a company enter insolvency and directors have provided a personal guarantee, they must not repay the loan in favour of other lenders. This is called ‘preferential payment’ and will be disallowed by the court should the company be liquidated.
Begbies Traynor can provide detailed advice and guidance to company directors who are under pressure from lenders. We have vast experience of negotiating with lending institutions, and our involvement can provide reassurance that you are able to repay.
The reason why a personal guarantee is often requested by a lender is to reduce their level of risk. If a company operates in a high-risk industry or has a history of non-payment, directors may not be able to access business borrowing without one.
The risk to a director involves personal liability for repaying the business loan in full, if their company becomes insolvent and is subsequently liquidated. In this instance, the lender is likely to enforce the guarantee in order to recover their money. If a director cannot repay the full amount straight away, the lending firm is likely to take further action through the courts.
This kind of lender pressure can be severe. Ultimately, a director’s home and other assets are at risk when they sign a personal guarantee, so it is not a decision to be made lightly. But there are actions that can mitigate the risk of personal liability, and reduce the level of pressure placed on directors of the debtor company.
An informal agreement with the lender
It may be possible to negotiate with a lender to repay the money over a period of time. The assistance of a licensed insolvency practitioner can be invaluable when negotiating under these circumstances, and offers reassurance to the lending company that their money will be repaid.
An insolvency expert also understands the issues from a lender’s point-of-view, and is able to address their concerns whilst presenting an affordable proposal on behalf of the director. Although not always successful, if a personal guarantee is enforced, informal negotiations can be a good starting point, and shows the director is willing to pay without being taken through the courts.
Personal guarantee insurance
Directors can protect their personal finances to some extent by taking out personal guarantee insurance. This type of cover rises incrementally, generally over a period of five years, and then levels out, so up to 90% of the guarantee provided may be covered from year five onwards.
If the company becomes insolvent during the early years of a loan, the situation will be more serious for the director, as only a small proportion of the personal guarantee may be covered at this stage. But even this sum may help to prevent personal bankruptcy, if the director can sell other assets or use savings to pay the remainder.
Even if a personal guarantee has not been provided, failing to meet repayments will lead to considerable pressure from a lender. Directors may be able to trade their way out of financial difficulty, using a formal procedure such as a Company Voluntary Arrangement (CVA).
This effectively restructures company debt into one formal arrangement that is repaid monthly, so improving cash flow and reducing the ongoing pressure felt by company directors.
Furthermore, interest and charges on the loan will be frozen under the new instalment plan, and the company is protected from legal action as long as repayments are made.
Begbies Traynor are insolvency and business rescue specialists. We have extensive experience of negotiating with lenders, and helping directors deal with the significant pressure if their company defaults. Call one of our expert team to arrange a free, fully confidential same-day meeting. We operate from over 70 local offices around the country.