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Getting personal
24 April 2009
Larry Ryan looks at how personal guarantees are affected when a company becomes insolvent
Bank of Ireland recently began proceedings to recover €4 million in respect of personal guarantees made by two directors of a Laois development company that is in receivership. Many similar cases are likely in the coming months. So how do personal guarantees work in an insolvency case?
In most cases, the pursuit of a personal guarantee is a last resort for banks. Although such guarantees by company directors have become more common in recent years, banks typically elect to work with developers to maximise the value in ongoing projects.
Personal guarantees cannot be triggered during a protected examinership period, but the guarantees don’t go away. Even after a bank (or any other creditor) accepts a scheme of arrangement proposed by an examiner, there is still recourse to personal guarantees once the examinership period is completed.
For example, in the Ocean Bar examinership case, ACC accepted a write-down of a significant portion of its €1.3 million secured debt. However, while it hasn’t yet done so, ACC is entitled to pursue guarantors for this bad debt.
To retain recourse to personal guarantees in an examinership case, creditors must comply with a number of requirements set out in the Examinership Act.
Most importantly, the personal guarantor must have the same opportunity as the creditor to vote on any scheme of arrangement proposed by the examiner.
In practice, this means the guarantor must receive 14 days’ notice of a creditors’ meeting – or at least be informed within two days of the creditor receiving notice. If this condition isn’t met, the personal guarantee is void.
There has been a lot of speculation in recent weeks about the status of personal guarantees when loans are transferred to NAMA, the new national asset management agency. In these cases, security arrangements transfer along with the loan so NAMA can pursue these guarantees in the usual way.
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