What happens to my personal guarantee if I do a pre pack?
A pre pack can be a very good way of solving a company debt problem. However where debt remains unpaid, creditors will call in any personal guarantees leaving directors personally liable.
The pre pack process (sometimes known as phoenixing) enables a brand new limited company to be set up which buys the assets of the old business. Employees are transferred across to the new company which then starts to trade in its place.
After the proceeds of the asset sale are distributed to outstanding creditors, the old business is normally closed. This often means that creditors are left without being fully paid.
Remaining debts are not transferred to the new company. As such, if any of the outstanding debts (very often bank loans and overdraft facilities) have been guaranteed by the company directors, they will be personally liable to make good the shortfall.
If you have given a personal guarantee for a company debt in this way and are in a position to pay the outstanding balance, you will be obliged to do so.
If you are not in a position to pay or agree a staged repayment plan, then the creditors are likely to start collections action against you.
It is common for creditors to take legal action in the form of applying for a county court judgement. This could then pave the way for further action such as issuing a charging order against your home.
If you find yourself in this position, you should consider a personal debt solution such as a debt management plan or individual voluntary arrangement (IVA).
A debt management plan is an agreement with your creditors allowing you to repay what is owed in manageable monthly instalments. It is a flexible solution and avoids the possibility of releasing equity from your property to repay what you owe.
However, if you use a debt management plan, all of the debt must be paid which could take a considerable time.
The alternative solution is an Individual Voluntary Arrangement (or IVA). This is an agreement with creditors allowing you to make payments to settle what is owed achieved through monthly payments which normally last for five years or with a one off lump sum settlement.
The advantage of an IVA is that a considerable amount of what you owe may be written off. However, if you are a home owner, you will be obliged to release equity from your property to increase the return to your creditors.
The implications of being a guarantor of company debts are serious given that you will become personally liable for the shortfall if the business is not in a position to pay itself.
As such, when considering whether to undertake a company debt solution such as a pre pack or company voluntary arrangement, you must also consider how this will affect your personal financial situation.
If you are likely to be left personally liable for any of the debt, then planning how to manage this is an important part of the process.