It is anticipated that company insolvencies and claims against company directors will increase this year following the easing of the statutory restrictions governing insolvency proceedings.

Inevitably, this will result in the enforcement of Personal Guarantees given by directors by the service of Statutory Demands and subsequent bankruptcy proceedings.

Stuart Southall of Kangs Solicitors comments on these insolvency procedures.

The team at Kangs Solicitors has vast experience and is highly regarded nationwide for assisting companies and individuals in relation to a wide range of insolvency related procedures including:

For an initial no obligation discussion, please call our Team at any of our offices detailed below:

Personal Guarantees | Company Directors | Kangs Insolvency Law Solicitors

For the vast majority of companies there will exist at some stage a requirement to borrow money whether such need arises during the early days whilst a company grows or, subsequently, to meet whatever needs arise from its trading activities.

The Insolvency Act 1986 imposes the strict requirement that a company must be solvent at all times, meaning that it can discharge all of its debts as and when each one falls due.

To meet this requirement, one or more directors may borrow money personally and inject that borrowed capital into the business, thereby incurring personal risk and debt which may result in substantial loss if the company fails.

If it becomes necessary for the company, which is a legal entity separate to the directors and shareholders, to borrow money for whatever purpose, one, or more, directors, will almost certainly be required by the Bank, or other lending institution, making the loan to ‘Personally Guarantee’ that such loan will be repaid. This will, invariably, require such director(s) to provide adequate security to cover such loan. This security will normally be provided by way of a Legal Charge upon a director’s home or other real estate although any other item of real intrinsic value may be acceptable.

Personal Guarantees may be requested from a director(s) to support loans made in a variety of guises such as:

  • Unsecured Business Loans;
  • Invoice Finance;
  • Property loans;
  • Bank overdrafts; and
  • Credit Agreements.

A Personal Guarantee entitles the Lender to seek and recover repayment from the director(s) or anyone else who guaranteed the loan in the event that the company fails to do so, for whatever reason.

Subject to the discrete terms of the relevant Loan Agreement, a Lender is generally entitled to sue the person providing the Personal Guarantee for outstanding monies without taking recovery action against the company which benefited from the financial support.

Enforcement of Personal Guarantees | Kangs Statutory Demand Solicitors

Should it become necessary, for whatever reason, for a Lender to enforce a Personal Guarantee, it may choose which method of enforcement it wishes to employ.

Two methods of enforcement regularly used are:

  • Statutory Demand, followed by Bankruptcy Proceedings;
  • County / High Court claim in order to secure judgment

Statutory Demand followed by Bankruptcy Proceedings          

The service of a Statutory Demand puts the debtor i.e. the Personal Guarantor, on notice that unless the debt is repaid or an arrangement can be reached for repayment by instalments, the party serving it, known as the creditor, intends to show that the debtor is insolvent.

The rules governing the service of a Statutory Demand and the presentation of a challenge to set it aside upon receipt are very strict and it is essential that they are complied with.

For a Statutory Demand to be valid:

  • it has to identify the amount of debt and cannot be used to seek to recover an unliquidated amount,
  • the debt should not be disputed. If the debt is disputed and the creditor refuses to withdraw the Statutory Demand then the creditor is at risk of paying the legal costs of the other party.

Once served with a Statutory Demand, the debtor has eighteen days in which to apply to set it aside by making an application to the Court, or twenty-one days in which to pay the debt or make an agreement to do so.      

If these statutory time frames are missed the creditor may petition for the debtor’s bankruptcy, provided that the debt exceeds five thousand pounds.   

County / High Court claim in order to secure Judgment

Whilst issuing a Statutory Demand followed by a Bankruptcy Petition may be regarded as a ‘heavy handed’ approach, the alternative Court processes in both the County Court and the High Court involve greater cost, time and effort thereby making the procedure less attractive.

It will, of course, be the case that it may well be very difficult for someone who has provided a Personal Guarantee to dispute the debt.

Clearly, the civil courts are to be used when it is known that the debt is contested.

Challenging Liability Under a Personal Guarantee | Kangs Contract Disputes Solicitors

Whilst an individual is entitled to dispute liability under a Personal Guarantee, in the same way that liability may be challenged under any other form of contract or agreement of whatever nature, it is essential that the argument being advanced is sufficient to persuade a court that ‘on the balance of probability’, it is correct.

One of the hurdles to be faced when disputing liability under a Personal Guarantee is the general requirement of those institutions making loans to see evidence that the potential guarantor has received, and can evidence proof that, independent legal advice has been received explaining the obligations and liabilities attached to such transaction.

Who Can I Contact for Advice & Help? | Kangs Solicitors

As can be seen from the above, failing to take experienced advice on matters involving Personal Guarantees and Statutory Demands may well prove to be extremely costly and it is essential that proper advice is sought.

Kangs Solicitors is accustomed to assisting and supporting clients on all matters relating to:

Please do not hesitate to contact the Team at Kangs Solicitors through any of the following who will be pleased to speak to you:

Stuart Southall
0121 449 9888 | 020 7936 6396

Tim Thompson
020 7936 6396 0121 449 9888

Hamraj Kang
07976 258171 | 020 7936 6396 | 0121 449 9888