How limited is liability with personal guarantees?
September 10, 2021
Limited liability arrangements have long been thought of as a secure way for a business owner or director to clearly separate and protect their personal wealth from their business liabilities. Unfortunately, over time, these protections have slowly eroded, leaving business owners and directors in a more uncertain and, given the current times, potentially volatile position, both for their business and their personal wealth.
One of the most common dilutions of limited liability protection is when a lender asks for a personal guarantee. Business owners and directors may give security in the form of a charge over their residential properties or other tangible personal assets, blurring the line between their business and personal liabilities.
The Bounce Back Loan Scheme
The issue of personal guarantees has become especially problematic over the pandemic due to their use with the Bounce Back Loan Scheme support. Although BBLS is backed by the Government, the lender arrangement is the same as it would be for any other loan between bank and borrower, making the guarantee in favour of the lender. In practical terms, this means the lender must seek to recoup the funds from the business owner in the first instance, and will only be able to claim from the government when they have failed to do so.
The consequences of the pandemic support packages offered may inadvertently conclude in distressing businesses further, while also creating an alarming situation for the security of business owners’ personal assets.
Tried and tested options are available
Although the use of personal guarantees with the BBLS appears to be unknown territory, in reality it is still a loan, meaning there are clear and tested options available to business owners and directors who find themselves unable to repay. If facing a default, business owners will be well-served in seeking advice from a Business Advisory specialist at the earliest opportunity, when the most options are available. They can advise on the best route forward for the business owner to support rescue and turnaround options whilst taking into account their personal position.
Business turnaround webinar
If you are currently facing business challenges related to personal guarantees and the pandemic support schemes, our specialists discussed these issues at our webinar in September 2021.
To register for our second webinar in the series: Repositioning Business and Personal Wealth – Post Pandemic, taking place on Wed, 13th Oct, 2021, 11:00-11:45am, please click below.