Guarantees are serious undertakings and it is important to
understand the consequences that may result.
You've probably come across a request for a guarantee if you are a
company director and the company has applied for a lease, loan or
Sometimes a finance company representative or real estate agent
will 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
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 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.
What does a Director's Guarantee do?
One of the benefits of creating a company is that the company
stands separate from you (a natural person). A limited 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 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
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.
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 about how your liability ends in circumstances where the
company continues to trade but you are no longer a director or with
What should you do?
Giving a 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
Consider things such as:
- The total amount that must be repaid under the
- 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, 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
- What are the possible commercial, legal and financial
implications of the guarantee?
- Whether the risk outweighs the benefit of obtaining the
Seek professional advice before you sign a 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
When there is so much at stake, there are no dumb questions.