Business owners are often lent an umbrella when the sun is shining but asked for it back as soon as any rain appears and this brings the personal guarantee into sharp focus.
Providers of credit and those looking to protect their interests (i.e landlords) will often seek a personal guarantee from the business owner as a back stop protection against default. Given that the ‘credit quality’ of the PG is seldom assessed till it is called in means that an increasing number of guarantors are facing personal bankruptcy after the liquidation of their limited liability company. It is also fair to say that the impact of a personal guarantee is never really fully appreciated until there are solvency issues and it appears on the radar of the company creditors.
Whilst bankruptcy is often viewed as wiping the slate clean, the reality can be very different and the effects of bankruptcy are long lasting and punitive in many respects. In our view it should be avoided at all costs and the proper management of your PG’s can play a vital role in actually keeping your slate clean.
Our obvious advice is, wherever possible, to not sign a PG however this is simply not realistic in New Zealand where credit is in short supply and therefore positions are being protected at every commercial juncture.
We recently had a situation where a company went into liquidation and the sole director/shareholder had guaranteed the lease, car finance and a large loan from a trading bank. With no assets to cover any of this we negotiated a number of concessions from the lenders and landlord. As a consequence the guarantor was in a far stronger position and they still had the benefit of a blank commercial canvas on which to paint their next business masterpiece….
We at InSolve have plenty of strategies to reduce your PG exposure so please get in touch if you would like to discuss your situation. We always take a common sense approach and will quickly give you the clarity that you need.
