When might a director sign a personal guarantee?
Given the potentially damaging effects, you might wonder why a director would agree to sign a guarantee. However, they also serve an important purpose by giving businesses access to finance at a competitive rate when it may not otherwise be available.
For example, lenders, landlords and suppliers may ask for a director’s personal guarantee when:
- A company has little or no trading history and/or limited assets
- A business is already showing signs of financial distress
- The company has had defaults and other adverse credit events in the past
- A loan or finance agreement involves a significant sum of money
Providing a director’s guarantee gives the lender or finance provider another way to recover their money if the business fails. That reduced risk enables the lender to agree to deals they might otherwise refuse and offer more competitive rates.
Examples of financial products that commonly require a director’s guarantee include bank loans, commercial leases, credit lines from suppliers, invoice finance agreements and asset finance deals.
What are joint and several personal guarantees?
In some cases, a lender may ask for a personal guarantee to be signed by two or more directors and make them ‘jointly and severally’ liable for the repayment. That reduces the lender’s risk, as in a joint and several personal guarantee, the lender can pursue any or all of the guarantors for the full amount. So, if one director fails to pay, the lender can pursue the other directors to make up the shortfall.
Joint and several personal guarantees can often be a source of conflict for company directors. That’s because, rather than pursuing all the guarantors for the debt equally, the lender may choose to pursue the director with the highest income or the most valuable assets. That director will then have to seek repayment from their co-signatories. If those directors are unwilling or unable to pay, the first director will be stuck with the full liability.
How does a lender make you liable for a director’s personal guarantee?
If your company fails to pay the debt as agreed, whether that’s due to missing payments or becoming insolvent, the lender can call in or trigger the personal guarantee.
To do that, they will issue a demand letter requesting that you pay the outstanding amount in full, subject to any limits as dictated by the terms. If you are jointly and severally liable, the lender may ask you and the other guarantors to each pay a proportion of the debt.
If you cannot pay what you owe or choose to ignore the demand, the lender can then take action by:
- Filing a County Court Claim or Statutory Demand against you
- Applying for a Charging Order over personal assets, including your home
- Enforcing the judgment through bailiffs or bankruptcy proceedings
Ultimately, their goal is to recover the debt by whatever means possible. They can do that by seizing personal assets, including your car and any financial investments you may have. Lenders commonly target the family home, as it’s usually the easiest way to recover a significant liability.
Can you liquidate a business to avoid a director’s personal guarantee?
Dissolving or liquidating your limited company is not an effective way to avoid a personal guarantee. The only way to discharge the guarantee is for the business to pay the outstanding liability in full before you close it down.
However, you must be careful here. If the company is insolvent, you must treat all your creditors equally. That means you cannot make payments to certain creditors, such as a lender with a personal guarantee, and not to others. If you do, the transaction can be reversed, and if that’s not possible, you may be required to compensate the company for the benefit of your creditors as a whole.
If you want to close an insolvent company with a personal guarantee, you should contact a licensed Insolvency Practitioner. They will inspect the terms of the guarantee, determine your level of liability and whether it is enforceable, and advise you on how best to proceed.
Read more: Liquidating a company with an outstanding personal guarantee
Does resigning release you from a director’s personal guarantee?
Resigning from a limited company does not cancel a director’s personal guarantee. This is only possible if it is included in the terms of your agreement, which is very rare.
If you do plan to resign, you should discuss with the lender the possibility of being released from the deal. If the company is in good financial health and has made all its repayments to date, it may be something the lender considers. However, it will usually request that a remaining or incoming director becomes a guarantor in your place.
Another option is to discuss repaying the lender in full before you resign, or refinancing it under new terms. That might be something your fellow directors or shareholders will agree to as a method of avoiding disputes and facilitating your smooth exit from the company.
What to consider before signing a director’s personal guarantee
As we’ve said, a director’s guarantee can serve a useful purpose by enabling less established businesses to access credit at competitive rates. However, you should consider every aspect of the guarantee and seek advice before you sign.
Understand the risks
Make sure you understand exactly what you’re signing and the implications for you and your fellow directors if the company fails. That should include an analysis of the company’s potential performance outcomes and the effects they’ll have on its financial viability.
Consider the alternatives
Are there other sources of funding that could give you access to credit without requiring a personal guarantee? For example, asset-based lending, which uses an asset owned by the business as security for a loan, reduces the risks for you personally.
Negotiate the terms
There is always room to negotiate the terms of a personal guarantee. For example, you should consider whether:
- The guarantee is limited or unlimited in value
- Whether directors are jointly and severally liable
- What happens when a guarantor leaves the company
- Whether there’s any security, such as a charge on a director’s home
Consider the impact it could have on co-director relationships
It’s sometimes the case that one director refuses to be bound by a personal guarantee, does not pay their share or ignores creditors when they call in a joint and several guarantee. That can damage co-director relationships and the company.
Need advice?
If you have signed a director’s personal guarantee and your company is struggling, or you are considering guaranteeing a company loan personally, it’s crucial to get advice from the experts.
At UK Liquidators, we can discuss your circumstances and provide practical guidance and support, whether you want to close a limited company or better understand your options. Please get in touch for a free consultation or arrange a face-to-face meeting at one of our local offices throughout the UK.
