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 other finance.

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 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 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 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.

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 the company.

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 giving.

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, 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 are the possible commercial, legal and financial implications of the guarantee?
  •  Whether the risk outweighs the benefit of obtaining the loan.

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 financial position.

When there is so much at stake, there are no dumb questions.

Written by Michelle Carabine at 09:00





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