Don’t let personal recourse catch you out

Prior to the global financial crisis, access to funding was relatively straight forward.  Banks and specialist lenders would lend in most cases with light due diligence.

Following this downturn, banks have spent years trying to exit residential and commercial real estate transactions, with a glut of non-performing loans being sold onto specialist loan servicing funds to recover the debt.  

As a result of this we have seen a seismic shift in the care and attention taken by borrowers when taking on fresh debt or restructuring.  Many have had their fingers burnt, or know of someone local to them who has, with the ultimate backstop being the Personal Guarantee they signed.  

I expect many didn’t appreciate the extent to which this would impact their personal situation, long after the restructure or Administration.  

Borrowers now seem much clearer, and focused, on the personal recourse being requested from new funders.  In the boom years borrowers would simply sign the documents so they could get on with the project in hand, without giving too much thought or attention to the potential recourse. 

Most guarantees were via joint and several liability of the individual Directors of the business.

A Personal Guarantee is a written, legal promise from an individual to repay any shortfall on a specific loan or account which cannot be met by the principle debtor, normally the Single Purpose Vehicle (SPV) or trading business.  As mentioned above, most guarantees require joint and several liabilities, meaning that each individual who signs a guarantee can be held responsible for the whole amount of the debt.  

Personal Guarantees aren’t always standard, but can be negotiated to a certain point.  However your willingness to sign a personal guarantee reflects your commitment to the success of the business or transaction, by putting your personal assets at risk.  When a Personal Guarantee is signed, the signatory becomes personally liable for the loan, even if the business is incorporated with limited liability, or offshore.

We are finding an increasing concern from Directors of borrowing entities to put up personal guarantees to enable transactions to proceed.  This effectively leads to a stalemate, if an amicable middle ground cannot be achieved.

One solution is Personal Guarantee Insurance.  It is a fairly new product to the UK market, and is generating some serious interest from our customers.  It helps Directors insure against the potential risk the Personal Guarantees would impose if the deal went sour.  

Insurance policies are tailored for Directors who are exposed to Personal Guarantees, indemnifying a set proportion of the liability.  The insurance will pay out a percentage of the liability under the Personal Guarantee, which is often capped after a certain amount of time to around 90% of the maximum value. 

The amount of cover is dependent on the value of the Personal Guarantee given, and the length of time the insurance has been in place.  This insurance is used to give the director of new enterprises peace of mind as they progress into success.

We have successfully negotiated a number of Personal Guarantee liabilities down on behalf of our borrowers.  Across a range of sectors from Construction to Leisure we have exited positions for guarantees from £100,000 to £8,000,000. 

We utilised a range of proven structures and negotiating strategies to deliver results, a recent example being a £2,000,000 personal guarantee liability being settled for £0. 

If this advisory service would be of benefit then contact our Business Development Director Mark Reidy or our Managing Director Jamie Davidson to discuss on 0131 564 0172.

Jamie Davidson | Jamie@ConduitFinance.com 

Mark Reidy | Mark@ConduitFinance.com 

 

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