Directors of small and medium sized companies who have given personal guarantees to their bank in order to secure their company’s overdraft could be in for a shock if their company goes bump, according to Nick Hulme, Corporate Finance expert with Barlow Andrews, the Bolton and Darwen based Chartered Accountants.

"There has been a series of case-law over the last few years which has caused a great deal of confusion over a bank’s ability to be repaid ahead of any other creditors from the proceeds of a company’s trade debtors in the event of insolvency. This was finally clarified on 30th June when the House of Lords ruled that banks’ standard debentures can only create what is referred to as a floating charge over book debts and not a fixed charge as was previously thought. The upshot is that banks can now only be repaid from debtor proceeds after the payment of creditors known as Preferential Creditors, such as the Crown and certain employee for certain claims.

“Where a company director has personally guaranteed his company’s borrowings with the bank he may now find that he has to pay out more than he bargained for when he originally gave the guarantee”.

Nick Hulme, who specialises in matters such a company funding and re-financing, added “To avoid sleepless nights over this, company directors who have any concerns should discuss this with a specialist corporate finance adviser or with their bank as there are ways in which this exposure can be mitigated”.

For further information please contact Nick Hulme.

07/12/2005