Personal Guarantees - Worth It or Worthless? Restructuring

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With the predicted increase in corporate failures over the coming months, recoverability of secondary obligations will become a primary focus, but the value and importance of personal guarantees now need to be assessed.

Over the past decade UK banks, other asset-based lenders and the growing peer-to-peer providers have increasingly required personal guarantees from borrowers. This was particularly prevalent with small and medium-sized enterprise borrowers. For the lender this was an important fallback recovery option in the case of default. In other words, personal guarantees were viewed as a way a lender could shield themselves from some of the risk. However, recoverability under a personal guarantee will very much depend on the guarantor’s asset position.\

A personal guarantee is one that is given by an individual as opposed to a trading entity. That means the liability is personal to the guarantor, there is no protection from a company and personal assets are on the line. For lenders, personal guarantees are highly attractive when the guarantor has assets to cover any exposure. If there are assets then there is no need to wait for the formal insolvency of the corporate entity to pursue a guarantor, there just needs to have been default by the principal borrower. Recovery action can be taken against the guarantor as soon as default occurs. 

Effective due diligence on the guarantor at the point of providing finance to the principal borrower may have identified assets that have since been transferred or are in the process of being removed. Therefore, a freezing order maybe appropriate or bankruptcy proceedings against the guarantor to deploy the extensive powers of a trustee in bankruptcy.

Lenders need to be aware that in certain scenarios, personal guarantees can become unenforceable due to issues such as limitation.

How We Can Help

The team at Duff & Phelps can provide support on individual cases or alternatively a portfolio overview and advise whether the personal guarantee is worth pursuing. We have the resources and expertise to undertake a deep dive analysis of a guarantor’s financial position.

Our review provides the information to decide whether to pursue the outstanding liability or write the balance off. Either way, it will give an early assessment of the position and allow a lender to focus its resources and efforts more productively. This can allow for a head start on recovery action, particularly in situations where the guarantor is a director who may have been anticipating the demise of the company and attempted to take steps to protect his/her personal asset position.

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