Personal guarantees April 2021
Apr 13 2021
A personal guarantee is a promise or agreement to make yourself personally liable for a debt. Where credit applications, terms of trade or lease agreements are entered into with a company, it is a common requirement that a director or another entity provides a personal guarantee.
The purpose of a personal guarantee is to limit the exposure of the supplier or lender (creditor), so that if the corporate customer defaults or becomes insolvent, the guarantee may be called upon to recover funds from the guarantor, usually with interest and costs. What happens though if the guarantor becomes insolvent and enters into a formal insolvency appointment?
This update explains the situation for the creditor in those circumstances where the guarantor is an individual or a company
Individual Guarantor
Bankruptcy
Should a guarantor become bankrupt, whether it be voluntarily or involuntarily, the creditor is unable to pursue the guarantee further. The creditor may however make a claim in the bankruptcy for the amount owing by the guarantor. The creditor may then participate in any dividend declared to the creditors in the bankrupt estate once their claim is admitted.
Section 73 Composition
A composition under Section 73 of the Bankruptcy Act 1966 is where a bankrupt submits a proposal to the trustee of the bankrupt estate to compromise the debts of the bankruptcy. Should the proposal be accepted by creditors, the bankrupt estate will be annulled.
In these circumstances, the creditor would receive notice from the trustee of the composition proposal. The creditor is able to vote to accept or reject the proposal. Should the proposal be accepted, the creditor is able to participate in any subsequent dividend.
On a side note, should the guarantor become bankrupt before the principal debtor and the debt continues to be incurred by the principal debtor, any debt incurred after the date of bankruptcy would not be provable and the creditor would not be eligible to participate in any dividend for that amount.
Annulment
An annulment may also occur where the costs and debts of the bankrupt estate are paid in full. A creditor may call upon its guarantee in this instance to receive payment of its debt in full. An annulment may also occur by application to the Court, usually seeking an order to set aside the bankruptcy order or otherwise an order stating the debtor’s petition should not have been processed. In these circumstances, given the bankruptcy is set aside, the creditor may pursue the guarantor under the guarantee if it has not been satisfied.
Personal Insolvency Agreement (PIA)
A PIA is a legally binding document to facilitate an agreement with creditors to settle their debts and avoid bankruptcy. A controlling trustee takes control of the debtor’s property and provides a recommendation to creditors on whether to accept the debtor’s proposed agreement.
A creditor with a guarantee from the individual may participate by proving their claim and voting on whether to accept the agreement. Should the proposed agreement not be accepted, the guarantee remains and the creditor may pursue the guarantor for the amount outstanding. Should the agreement be accepted, the creditor may receive payment of the outstanding debt, or a dividend thereon, depending on the terms of the agreement.
Company Guarantor
Voluntary Administration
Voluntary Administration is a process where an insolvent company is placed in the hands of an administrator who assesses all the options available and recommends the best outcome for creditors and the future of the company.
In the event that a company has guaranteed a debt, the creditor is unable to pursue the guarantee during the period of administration. Should creditors decide to place the company into liquidation or accept a Deed of Company Arrangement, the creditor may participate in any dividend declared in the liquidation or pursuant to the provisions of the Deed of Company Arrangement, should it be accepted.
Liquidation
Where a company which has subsequently been placed into liquidation has provided a guarantee, the creditor may only pursue its guarantee by proving its debt in the liquidation or by leave of the Court, should it wish to pursue its debt and obtain judgement against the company.
Once its claim has been admitted in the liquidation, the creditor may then participate in any dividend declared to creditors in the liquidation, should surplus funds be available to do so
For a free, no-obligation discussion, please feel free to contact Stephen Michell | Philip Newman | David Quin