Small business owners facing failure also face increased risk of losing their home.
This December, HMRC is set to become a preferred creditor in a business insolvency, putting thousands of owners and directors of small businesses who have signed a Personal Guarantee at increased risk of losing their home and other personal assets if the business fails[i]. This includes small businesses who have secured loans over £250K through the Government’s CBILS. Purbeck Insurance Services, provider of the UK’s only Personal Guarantee Insurance, is calling on the Government to delay the change until the worst of the pandemic is over. The new rules were originally due to be effective from April 2020.
When a business fails, any available funds are paid out to creditors in order of priority. HMRC will move to third place alongside preferential unsecured creditors e.g. employee related arrears such as wages. This means that compared to the current rules, for a business owner going into insolvency, any available ‘pot’ of funds left to pay existing Personal Guarantee backed loans will be reduced or even wiped out.
With less funds in the pot to pay off any outstanding business loans and offset the Personal Guarantee following business failure, a director or business owner could find that as the loan is called in, their personal assets need to be used to settle the debt[ii].
For businesses owed money by a customer who has become insolvent, they will be much further down the list of creditors to be paid, and may find there isn’t any money left over to pay the money they are owed. This in turn could impact the financial performance of their own business.
Once again, if the business owner has a Personal Guarantee, they will need to be aware of the ramifications if their loans are called in.
Todd Davison, MD of Purbeck Insurance Services said: “There has been little recognition to date of the negative implications of this change for small business owners who have signed or are needing to sign Personal Guarantees to secure funding for their business. Indeed, it comes at a time when firms badly impacted by COVID-19 are increasingly looking for new funding as evidenced by the applications for loans under the CBILS. Finance secured independently is increasingly dependent on signing a Personal Guarantee. However, if the changes come in on 1st December, HMRC has made that finance riskier for both business owners who face insolvency themselves and indeed the customers of insolvent businesses.
“It makes no sense to introduce this change at this time and we hope The Government will confirm a deferral of at least six months. In the meantime, we would urge business owners to look at the ways in which the risk of a Personal Guarantee can be mitigated, including the use of Personal Guarantee insurance. This relatively new type of insurance offers protection against the risk that the Guarantee is called by a lender and will offset any outstanding obligations called in under a Personal Guarantee.”
[ii] This applies to where Personal Guarantees are attached to business finance facilities with floating charges (a liability to a creditor which relates to the company's assets as a whole and may become fixed in particular circumstances such as liquidation) and where Personal Guarantees are attached to unsecured business finance facilities.