The Coronavirus Business Interruption Loan Scheme: Minimising risk exposure from personal guarantees
The Government’s Coronavirus Business Interruption Loan Scheme (CBILS) for SMEs has been amended so that lenders are no longer allowed to request personal guarantees for any loans up to £250,000. However, if a business requires a greater loan, banks can still require a personal guarantee.
What is a personal guarantee?
When someone gives a personal guarantee, they promise that if their business is unable to repay its debt, the guarantor will pay instead. Guarantors of a company are often the directors of that company.
It is common for a lender to also take security over the guarantor’s personal assets, for example via a charge over their home. Under CIBLS, banks are not permitted to take security over the guarantor’s principal private residence (their home). However, security can still be taken over their other assets e.g. any other premises they own. An individual should be aware that when giving a guarantee, they will be putting their personal assets at risk.
Mitigating personal guarantees
Personal guarantees are usually produced by the lender, and therefore designed to give the lender maximum protection. Because of this, directors should always take legal advice before giving a personal guarantee, and consider how to minimise their risk exposure.
Potential guarantors should consider the following:
- Can the company provide security instead?
It is preferable for a limited liability company to give security, as this shields the individual directors from personal liability.
- What does the guarantee cover?
Where possible, the guarantor should seek to limit the scope of any personal guarantee. Guarantors should be cautious of guarantees covering future debt and/or accrued interest. Instead, the guarantor’s liability could be capped at a specific amount or percentage of the total loan, or be limited in time.
Under CBILS, after the proceeds of business assets have been applied, any recovery under a personal guarantee is capped at 20% of the outstanding CBILS loan balance.
- How much control does the guarantor have over the company?
The guarantor will only need to pay if the debtor company fails to do so. The guarantor should consider how much control s/he has over the company’s actions and ability to pay.
Where a guarantor does not have sufficient control over the company, they may wish to obtain some enhanced rights as a director/shareholder, either in a shareholders’ agreement or by amending the company’s articles of association.
- Split liability between guarantors
Most guarantees require guarantors to be jointly and severally liable. This means that each guarantor can be liable for the entire guaranteed loan. Guarantors should try to negotiate so that each is only liable for a share of the full amount and/or enter into a separate contribution agreement with all guarantors to agree how, between them, they will meet any claim under the guarantee and reimburse each other if one guarantor pays out more of his/her agreed share of the guarantee liability.
- What happens if the guarantor ceases to be a director?
Any guarantor should be aware that ordinarily any guarantee they have given will not ‘drop away’ if they cease to be a shareholder and/or director.
How Blaser Mills Law can help?
Our expert team is available to perform reviews of your personal guarantees and to provide tailored legal advice and assistance including in relation to the CBILS scheme. Please get in touch with the Commercial team on 020 3814 2020 or contact Matt Crosse directly at firstname.lastname@example.org