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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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2. 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
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K2 Business Rescue
The Emergency Service for Business
Call Tony Groom on 0844 8040 540

3. Need Immediate Help – Call Tony Groom on 0844 8040 540
K2 Business Rescue
The Emergency Service for Business
Call Tony Groom on 0844 8040 540