You’ve probably come across a request for a Director Guarantee if you are a company director and the company has applied for a lease, loan or other finance.
It is not unknown that a finance company or real estate agency will sometimes try to underplay the implications of providing a director personal guarantee. Be wary if they say that it is just a standard industry practice and a normal part of securing a loan or granting a lease.
That may be true, but it is a serious legal undertaking and it should never be considered ‘routine’ to sign such a binding commitment that could have a real sting in its tail.
What is a Director Guarantee?
Any company director that signs a Director Guarantee is giving a personal guarantee that the director will be liable for the company’s debt or commitment if the company does not meet that obligation.
The outcome could be as grim. If the company does not pay then you will have to… end of story.
Director Guarantees are usually required in loan, lease or other finance arrangements if the company is small and has limited assets. If there are concerns about the company’s ability to pay, the lender or landlord may seek additional security that could be seized to settle any outstanding debt. As a company director, that’s where you come in: they may want your assets to be on the line too.
What does a Director’s Guarantee do?
One of the benefits of creating a company is that the corporation stands separate from you (a natural person). A limited company or Ltd company is its own legal entity (a corporate person).
The corporate structure of this separate legal entity may provide some protection from the debts and other liabilities of the company. This protection could fail though if there was any insolvent trading by the company. Insolvency is the corporate version of bankruptcy.
If you have provided a Director Guarantee as security against a loan, that protection will probably be gone. You could be held personally liable to pay the debt if the company is unable to meet the financial obligation.
In a worst case scenario, the lender or landlord could request permission from the court to seize your assets, such as your family home, to repay the company’s debt.
Joint and Several Liability
If more than one guarantor (e.g. the company’s various directors) provide a guarantee, there may, depending on the terms of the guarantee, be ‘joint and several’ liability for the debt.
If several liability is accepted, you could each be held equally liable for the debt. Or the debt may, in certain circumstances, be enforced against some or even just one of the guarantors.
This is a very serious undertaking. If you are about to sign a joint and several undertaking then you must be careful to ensure you understand the full consequences that could result. Depending on the terms of the document, if the other guarantors don’t meet their obligation, then it could all fall on you. Clearly you may regret the outcome if you end up being the Lone Ranger responsible for the whole debt.
Also be aware that if the creditor has the right under the terms to selectively enforce the debt, then the creditor may come after the guarantor with the ‘deepest pockets’. So, it would be wise to get a realistic idea of the financial position of each of the other guarantors. Try to accurately assess the likelihood that you end up being burdened with most or even all of the debt.
If possible, it is also a good idea to try to set limited proportions or percentages of liability for the debt for each of the guarantors. Also ensure the creditor will take action first against the company and other securities before coming after you and the other company directors who gave the guarantee.
What is an all moneys guarantee?
An ‘all moneys’ guarantee essentially means that you will be liable for all the debts and obligations of the company.
This is a very risky guarantee to give, as the amount of debt could end up being far beyond what you originally thought you were signing up for.
Read the contract carefully and make sure that you are aware of the exact amount that you are liable for and the full extent of your possible liability.
What happens if you leave the company?
You are not automatically released from your guarantee if you stop being a director of a company.
Be sure you know how your liability ends in circumstances where the company continues to trade but you are no longer a director or with the company.
What should you do?
Giving a Director Guarantee may be an unavoidable part of financing a small business. Few lenders are willing to take the risk of granting a loan that doesn’t have a decent safety net for them.
If the company needs the finance and there is no other option, then at least pause and carefully consider the undertaking you are giving. Consider the consequences of the terms you are accepting. Seek professional advice before you sign a Director Guarantee if you have any doubts about the potential liability or if you are uncertain about the effect the terms could have on your personal life and financial position.
Consider things such as:
- The total amount that must be repaid under the guarantee.
- The amount of any interest or any other costs that may be added to the debt (the final amount owed may significantly exceed the original amount).
- The likelihood that the company will not be able to pay this debt and you will be personally liable.
- If others are involved, assess how likely it is that they will meet their obligation. Could you be liable for the whole debt?
- Whether you will personally be able to repay the loan.
- What the possible commercial, legal and financial implications of the guarantee may be.
- Whether the risk outweighs the benefit of obtaining the loan.
Be wise, seek independent legal and financial advice in relation to both the guarantee and the overall financial arrangement before you sign anything.
Don’t just rely on what the loan officer, bank employee, car salesman or real estate agent tells you: Always read the contract thoroughly. Ask for clarification of anything that you don’t understand and raise any concerns that you might have.
When there is so much at stake, there are no dumb questions.