Directors' Liability - Personal Guarantees

It is very common for directors to be asked to sign personal guarantees.

 
Do you know what you are signing?
 
Being asked to sign a personal guarantee is a common request for a director – they’re frequently used when renting premises, applying for accounts with suppliers and when seeking bank finance. So you probably sign away thinking that as the company enjoys limited liability status, you’ve little to worry about personally. Wrong! Any guarantee you give will be in your personal capacity. So if the company can’t pay its debts, you will have to cover them from your own reserves. So it is vital you understand what you are signing.
 
The typical clauses you may find in a guarantee are:-
 
1) Payment on demand means exactly what it says. If the company is either late in paying or fails to pay at all, you’ll be expected to find the cash instantly.
 
2) Joint and several liability means that if there are more than one of you acting as guarantors, then the creditor can choose whom they come after. It is entirely their decision.
 
3) All monies clauses are usually found in bank guarantees. As well as having to honour the debts of the company, the bank will ask you to pay up all outstanding personal loans, which may, of course, include your mortgage, any indebtedness on your own personal account, together with bank charges. In essence, everything you owe it!
 
How can you minimise your exposure?
 
1) Take the time to read what you are signing - naturally the other party will try to get the most onerous guarantee that it can from you. But everything can be negotiated. If in doubt, don’t sign – take advice from your lawyer first.
 
2) Make sure the guarantee includes an upper limit, e.g. “the total amount recoverable under this guarantee shall not exceed the sum of £X”. Avoid giving all monies guarantees.
 
3) Aim to limit the duration of the guarantee – otherwise it could run indefinitely. If you were to sell your company you could remain liable for its debts. Tie the guarantee to, e.g. the length of the loan or the time you’re dealing with a supplier, to limit your potential liability.
 
4) If your landlord insists on a guarantee, make sure you’re only on the hook to pay the rent for the duration of the original lease and not for any extended period that might arise due to the effect of the Landlord and Tenant Act 1954. If he’s more amenable, offer him a deposit of e.g. a quarter’s rent instead of a guarantee.

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