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Published on 15 July 2011by Tony Groom

How to Protect Personal Guarantees when a Company is Insolvent

Many companies continue to be run even when they are insolvent to avoid

triggering the personal guarantees of the directors and owners.

Some of these might be listed for sale or investment through brokers in the hope that

the buyer or investor will release the directors from their personal guarantees.

While the broker’s sales/ investment memorandum might try to justify a valuation

premium for the company, normally the interested party’s due diligence will get to

the bottom of its financial situation. It is at this point that the issue of personal

guarantees normally emerges and it is easy to ignore the primary reason for the

directors wanting to sell or seek investment.

In spite of any personal guarantees, a buyer/ investor might still be interested even

knowing the company is insolvent. Often directors are trying to protect their personal

guarantees from being triggered as would occur in liquidation or an asset sale via

pre-pack administration so negotiations focus on saving the company.

Very often personal guarantees are provided to secured creditors such as a bank to

cover loans or overdrafts that are already protected by a debenture which provides

for a fixed and floating charge over the company’s assets. In such cases the

personal guarantee is often only triggered by liquidation when the bank is left with a

shortfall.

In such circumstances the directors will benefit from new investors helping save the

company rather than buying its assets via a pre-pack administration. It makes sense

that new investors protect their new money such as by taking security and/or having

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a company voluntary arrangement (CVA) in place prior to investment. This avoids

creditors holding them to ransom.

A recent example was a furniture business. An investor wanted to buy the business

and assets via a pre-pack administration. This would have led to the bank having to

ask the director to make good any shortfall under his personal guarantee. Instead

the investor agreed to invest subject to approval of a CVA and him having security

over future stock purchases. The creditors supported the CVA and the bank renewed

its £180k overdraft facility and the investor’s money is now secure. Effectively the

investor provided working capital to fund the company by providing a stock facility

and the bank didn’t have to call on its guarantee.

In another example, an insolvent toy shop which was seeking investment, there were

two interested parties who both understood the need for investment to avoid

triggering a personal guarantee given to the bank by shareholders. The approach by

each was very different with one party focusing on minimising their own exposure by

insisting on a CVA while the other wanted to grow the business without the tarnish of

insolvency. While the deal involved giving up more equity, a CVA was not needed.

Rescue and turnaround advisers argue that if the owners of a business in difficulty

wish to sell or seek investment without triggering personal guarantees they would be

advised to call in a rescue and turnaround adviser before putting the business on the

market through a broker.

By having a restructuring plan in place, with or without a CVA the sale/ investment

can be structured in a way that protects them and the buyer/ investor. It also avoids

putting off interested parties who might be put off when the issue of personal

guarantees is raised.

We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth. Our team has worked for over 20 years to help stabilise and return hundreds of businesses to profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors and use your company’s assets to pay themselves. We work for you, not creditors.

More Free Resources for Directors and Business Owners in Difficulty www.rescue.co.uk

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Call Tony Groom on 0844 8040 540

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