Some credit managers will be familiar with the practice of seeking personal guarantees (PGs) from Directors to support credit extended to limited companies, but how much protection do they really provide?
PG stacking: a risk factor
The risk of a PG being of limited value increases when Directors provide multiple PGs (known as PG stacking), and their personal assets are not sufficient to cover the debts. Having a PG does not grant you any priority: whether you were the first or last to obtain the PG, you will be one of the Director’s unsecured creditors.
An article from the Purbeck PG Insurance Monitor shows that demand for insurance cover to protect Directors from claims against their personal wealth and assets increased sharply in 2023: up 93% year on year.
This suggests that Directors have become more concerned about a call being made on their PGs.
Managing risk
When managing multiple credit lines, it is important for credit managers to stay alert to any signs that the risk profile of a customer might be changing. This can be achieved through regular communication and by discussing any issues they might be experiencing. Sector-specific market intelligence can also help to flag any potential issues at an early stage, but there is not always transparency in a director’s finances. Often if a director’s company were to fail, then their personal financial circumstances are likely to deteriorate as well. One simple step that credit managers can take to assess the value of seeking a PG, or assessing an existing one, is to undertake a land registry search, as a PG backed up by a charge over a property is usually considered as a stronger form of assurance. Other steps could be to request HMRC and payroll information from the Director.
When considering making a call on a guarantor to enforce the payment under the PG, it is important to understand 1) if the PG is unlimited or limited to a specific amount and 2) what the payment terms are? Failing to make a payment under the terms of the PG could lead to a petition for an individual’s bankruptcy. You should seek legal advice before proceeding as a PG should only be provided by a ‘competent’ person. A claim against an individual in a bankruptcy would be ranked as an unsecured creditor. One of the reasons you may want to pursue this route of bankruptcy is if an individual was putting assets beyond the reach of creditors. Otherwise, you could be throwing more good money after bad.
Calls for a Register
The credit management industry has been calling for protection against the misuse of PGs for some time. Establishing a Register and making PGs a matter of public record could be an effective solution. But who would own and run the Register? And would it be mandatory? There have been many suggestions about how it might work, but ultimately the UK Government will need to decide what action to take. The credit industry will have to watch and wait, but in the meantime, we could be sat on a mountain of worthless PGs.
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