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, this 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 insolvency issues, and it appears on the radar of the company’s 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, not to 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….
InSolve Partners has 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.