And on the subject of personal guarantees here’s a question I recently faced from a client which explains in a little more detail how they work.
Q My company sold products to another company but it’s been 3 months beyond our terms and we haven’t been paid. They kept promising to pay but, for a few weeks now, they haven’t returned my calls at all.
I’ve looked at the paperwork and, in the original credit application, the director of the company gave a personal guarantee. I don’t know much about him but I do know he owns a big house and drives a Porsche.
Can I get a charge on his house? What if he goes bankrupt? How easy is it to liquidate the charge – it’s the money I want after all.
A As you have a personal guarantee, you have a choice whether to pursue the company or the director personally.
To get a charge, you would first need to issue court proceedings against the director to get a judgment. This can be done fairly quickly if he does not defend the proceedings.
Once you have a judgment, you can apply for a ‘charging order’ over his house. This is a two-stage process: firstly, you can apply to get an interim charge without him being aware what you are doing. The secrecy can help as otherwise he might do something quickly to transfer the house into someone else’s name. Next, there will be a court hearing, where a judge will decide whether to give a final charging order. These hearings are usually quite straightforward.
A charging order gives you a charge over his house behind any other charges or mortgages. If the house is owned in joint names, the charge only applies to his share.
Charges do not fall into the pool of assets that would be used to pay other creditors if he became bankrupt. In other words, once you get a final charging order, you will take priority over other creditors who do not have any security.
The charge means that, if the house is sold, you will be paid out of the proceeds of sale after the costs of selling the property and older charges and mortgages have been paid. It does not give you an automatic right to get the property sold.
If, after obtaining the charge, he still does not pay, you can ask the court to order him to sell his house in order to pay you. The judge has a wide discretion whether to do this and will take everything into account, including whether anyone else (e.g. wife or children) live in the house, whether they have anywhere else to live, other creditors of his, the amount he owes you and the amount of equity available in his house, how obstinate he has been in not paying, and so on.
A charging order is one of the most effective court methods of ensuring you get paid. It is certainly a procedure worth considering, especially when the debt is large. Usually, simply obtaining a charging order will be enough to persuade your customer to pay you but you may have to commence proceedings to sell the property too. |
