Personal guarantees and debt assignment: what directors must know when debt is sold

Directors are often obligated to provide personal guarantees when obtaining finance from third-party lenders.

When the debt remains unpaid for any number of reasons, the lenders often sell the debt (normally undervalue) to debt portfolio companies in the UK, such as Lowell, Cabot, Intrum & Azzurro. This FAQ on Personal Guarantees looks to assist directors and other individuals when being pursued personally.

For a general overview of how these agreements work, read our Essential Guide to Personal Guarantees. However, if your company has entered insolvency and your debt has been sold to a third party, the situation changes.

Why am I being pursued after my company went insolvent?

The reason is simple: the guarantee is still enforceable under English law. When you signed the guarantee, you entered into a binding contract. The company’s insolvency does not discharge your personal liability.

We appreciate that this often comes as a shock to directors who assume that limited liability protects them entirely. While limited liability applies to company debts, a personal guarantee overrides that protection for the specific obligation you agreed to cover.

How do debt buyers enter the picture?

the original lender decides not to pursue the debt themselves, they often sell it to a debt portfolio company. This is usually done by way of assignment, which is a legal transfer of the creditor’s rights under the original agreement. The assignment is governed by the Law of Property Act 1925 and is a well-established practice in the industry.

How binding is a personal guarantee after assignment?

Your obligations remain the same. The assignment simply transfers the creditor’s rights to another party. The new owner can pursue you for payment, add interest and costs, and issue court proceedings if necessary.

How enforceable are personal guarantees?

Yes, they are enforceable because they are valid contracts under English law. Assignment of the debt does not affect the guarantee’s validity. Courts routinely uphold these guarantees provided they were properly executed and not tainted by misrepresentation or undue influence.

What are the risks of a personal guarantee?

These debts should never be ignored, as doing so can lead to a County Court Judgment (CCJ) and enforcement action against your personal assets. Hypothetically, this could lead to a director losing their house, savings, assets and their credit rating.

In the eyes of these companies, this makes recovery more likely.

Why are directors aggressively targeted?

These firms purchase aged debts at a steep discount, then seek to recover as much as possible.

Example purchase price vs face value:

• Consumer unsecured debt: £0.01 – £0.10 per £1
  Commercial/SME debt: £0.10 – £0.30 per £1
• Secured debt: £0.40 – £0.80 per £1

For directors, this means the entity pursuing you may have paid up to 30p per £1 of face value but can still demand the full contractual amount, including interest and costs.

It is a thriving industry as commercial guarantees typically yield higher recovery rates (up to 75%) compared to consumer debt (approximately 12%).

Will I keep receiving letters from debt recovery companies if I ignore them?

The short answer is yes. Debt portfolio companies often instruct debt recovery agencies to send chaser letters and make contact. A lot of people are faced with aggressive recovery strategies by specialist firms with in-house legal teams.

These debt recovery letters are designed to encourage payment and may escalate in tone over time. However, they are not formal legal proceedings. Their purpose is to prompt you to engage before the matter reaches court.

What is the first formal step before court action?

Under the Pre-Action Protocol for Debt Claims, the first formal step is a Letter of Claim, usually sent by solicitors acting for the creditor or debt portfolio company.

It needs to contain specific information including detailing the debt and the supporting documents such as the guarantee and statements and gives you 30 days to respond. Ignoring it is not advisable. It can lead to a County Court claim being issued against you, which will increase costs.

How to get out of a personal guarantee?

There may not be a ‘way out’ of the guarantee entirely, but you have options. Early action is crucial:

• Check whether the guarantee and the assignment were properly executed and get advice on whether all formalities were met.
• Consider the contractual clauses to ensure they can be engaged in these circumstances. For example, was the credit limit varied in any way and did the lender comply with its own obligations under the terms.
• Seek advice on whether you were given sufficient notice of the guarantee and whether there was misrepresentation or undue influence when you signed.
• Engage with the creditor or their solicitors to use any leverage you have to negotiate a reduced settlement or payment plan.

How can I protect myself before signing a guarantee?

Before signing, take these steps:

• Seek independent legal advice to understand the implications.
  Review the scope, duration of the guarantee and whether liability is capped.
• Consider alternatives, such as offering security over company assets instead of a personal guarantee.

How can Morr & Co help?

Personal guarantees are serious commitments. Debt sale and assignment are common and lawful and ignoring letters will only make matters worse.

If you are being pursued, take advice early to protect your position and avoid escalating costs. Please do not hesitate to contact our Dispute Resolution team on 0333 038 9100 or email info@morrlaw.com and a member of our expert team will get back to you.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.