Personal Guarantees.

In an article published in the CICM magazine (December), the Author wrote an exclusive report headlined ‘Stacking the Odds’. It’s well worth a read and discusses both the validity of personal guarantees (PG’s), the lack of any central register and the fraudulent use of stacking, ergo the repeated issuance of PG’s by Directors to multiple suppliers and lenders in a commercial environment.

Credit Reference Agencies (CRA’s) used to hold such information in relation to PG’s in commercial transactions when linked to sole traders or partnership businesses but were forced in 1999 to separate consumer and commercial into two ‘discrete’ databases.

It’s my experience that PG’s in a commercial environment tend to be ultra-discrete. A business owner or Director, when not offended by a demand for PG’s prefers to have the arrangement private and indeed suppliers or lenders themselves feel obligated not to share the fact that such PG’s are present, either on a permanent or short term basis. While there is merit in asking CRA’s to manage PG’s issued I can’t see this being too effective given the nuances of those holding such PG’s and it would take quite some effort to maintain such databases accurately.

From a commercial supplier perspective, I was never a big fan of PG’s to secure debt as they invariably came with significant risks attached even though personal assets were evident. Quite some research was always needed to validate ownership of assets and indeed their true value and this often forced me to limit PG’s to lower level risk. Within the Technology distribution business for example, I rarely sought PG’s for more than 50K and within SMB clients this dropped to 25K.

I recall my first ever demand for a PG back in the mid-seventies when managing Credit for a division of the Rank Organisation. The rising popularity of VHS Video cassettes meant a growing number of retail operations, one of which was a relatively modest business in Central London called Carnaby Wholesale and which had recently come under new ownership. The demand, and it was a strong one was for a credit line of 75K but company financials were weak and those of its new parent were not much better, the only asset essentially being a Rolls Royce vehicle. The man behind new ownership was however well known nationally (The King of Soho) and had successful interests in Adult publications, Clubs as well as property investment.

I figured 75K was a reasonable risk and followed through with the PG while others felt his name and involvement was good enough.

Some 4-6 months later, the business collapsed, moving to insolvency. Retention of Title dropped our exposure to around 50K and we naturally called in the PG. It was paid in full within a month. Others, who relied simply on the investor’s business reputation, suffered loss.

In the ensuing thirty five years of managing credit and risk, I only ever resorted to personal guarantees on a dozen or so occasions and only called upon one other, again successful and for a lower value. Parent and cross company guarantees were to me, far more effective.

On one occasion, I was asked by a CEO to consider a Personal Guarantee of 200K as risk was too great and credit insurance was not available. His argument went along the lines of ‘he’s got loads of money, drives a Bentley, lives in a huge mansion and has varied business interests’. ‘He’d embarrass himself if he went bust’ was the final retort.

I insisted it was madness but he decided to approve the risk to 100k with a guarantee, against my advice.

The inevitable happened, the business collapsed within months, the guarantee was called and lo and behold, he’d issued these to multiple suppliers. He subsequently filed for bankruptcy with the only asset listed being a Rolex watch; everything else, the mansion, the cars, property and cash were all in the name of his wife and we ended up writing off just short of 80K.

Nice one to close with. I requested and was granted joint and several guarantees from two directors of a then SMB Reseller in Essex for an amount of 50K. This was to manage a series of at least three major deals over a period of months but the guarantee remained in place, buried within paperwork. It had been misfiled and some years later I came across it. The guarantee was not intended to be a permanent one but the issuers had forgotten they carried this liability and were relieved when I finally handed them the original guarantee they’d signed some 7 years earlier.

A primary responsibility of those demanding PG’s is to initially carry out the relevant due diligence, continued review for the duration of the PG’s and accurate or timely cancellation of these when circumstances warrant it.

As it is unlikely any Companies House or other central register will carry PG information, CRA’s will be at the mercy of lenders and suppliers feeding them the required details accurately in order to make such information available to users and that is a tricky thing to achieve given privacy aspects.