Introduction to Director Guarantees
A directors guarantee is a document in which a company’s directors agree to personally guarantee and repay certain debts of the company if it is unable to do so. This type of personal guarantee is often used by lenders as a way to reduce their risk when lending money to small businesses.
Who can agree to a Director’s Guarantee?
The company director who signs a director’s guarantee is typically the company’s owners, officers, or other high-ranking members of management. These individuals are typically required to have a significant ownership stake in the company and/or a personal financial interest in its success.
By signing this guarantee, these individuals are essentially agreeing to put their own personal finances at risk in order to help the company repay its debts.
Potential Director’s Guarantee Risks
While director’s guarantees can be helpful in reducing lender risk, they can also be very risky for the individuals who sign them. If the company is unable to repay its debts, the directors who signed the guarantee will be personally responsible for doing so. This could put these individuals at risk of financial ruin if they are unable to repay the debt themselves.
For this reason, it is important that directors carefully consider whether or not they are willing and able to take on this type of risk before signing a director’s guarantee. If they are not comfortable with the risks involved, they should not sign the guarantee.
However, if they are willing and able to take on the risk, this guarantee can be a helpful tool in securing financing for their company.
Seek advice from a small business restructuring specialist before signing a director’s guarantee to ensure you understand the risks involved.
Types of Director’s Guarantee
There are two primary types of guarantees: joint or all moneys guarantee.
Joint or Several Guarantee
A joint or several guarantee is a type of guarantee in which all the guarantors (e.g. the company’s various directors) agree to be equally liable for the debt. This means that if there are multiple guarantors, each one is liable for the entire debt.
All Moneys Guarantee
An all moneys guarantee is a type of guarantee in which the guarantor(s) agree to be personally liable for all the debts and obligations of the company. This type of guarantee is often used when the company is seeking financing from multiple lenders.
Make sure that you have read the contract carefully and understand your obligations before signing any type of guarantee.
What happens if you decide to leave the company?
If you decide to leave the company after signing a director’s guarantee, you may still be held liable for the debt. It is important to check the contract carefully to see if there are any conditions or clauses that would release you from the personal guarantees if you were to leave the company.
It is also important to note that even if you are released from the guarantee, the lender may still come after you for payment if the company is unable to repay its debt. This is because the lender can still attempt to collect payment from anyone who has signed a personal guarantee on the loan.
For this reason, it is important to consider your long-term financial obligations before signing a director’s guarantee. If you are not comfortable with the risks involved, you may want to consider other options for financing the company.
Can a Director Get Out of a Director’s Guarantee?
Yes, a director can get out of this guarantee in certain circumstances.
For instance, if the company is wound up and the directors are found to have acted improperly, they may be liable for the debts of the company. However, if the directors have acted in good faith and reasonably believed that their actions were in the best interests of the company, they may be able to avoid personal liability.
Another example is that if you resigned from the company and requested the creditors to release your name from the guarantee, most creditors would agree to do so.
Creditors may also agree to release you from a guarantee if you can show that you are experiencing financial hardship and are unable to pay the debts guaranteed.
However, this is not always the case, and each creditor will make their own decision about whether or not to release you from the guarantee.
Can you remove yourself from a personal guarantee?
No. You can only be released from your obligations under the above circumstances.
If you are struggling to meet your repayment obligations under a director’s guarantee, it is important to seek professional advice as soon as possible to explore all of your options for legal services.
What if the Director Is Unable to Pay the Debt Owed?
If the director is unable to pay the debt owed, they may be declared bankrupt. This means that their personal assets will be sold in order to repay the company’s debts owed. If the director does not have enough assets to cover the debt, the creditors may still pursue legal action against the director.
It is also worth noting that being declared bankrupt can have significant implications for a director, including:
- Being banned from acting as a company director
- Disqualification from certain professions
- Losing your home
- Difficulty obtaining credit in the future.
Therefore, it is important to seek professional advice if you are struggling to meet your repayment obligations under a director’s guarantee.
Is There Any Way to Avoid a Director’s Guarantee?
Once you have signed a director’s guarantee, it is not possible to avoid it. However, there are some steps that you can take to limit your exposure to personal guarantees. For instance, you can:
- Make sure that the company is in good financial health and has sufficient assets to cover any debts that it may incur
- Keep track of the company’s finances and ensure that all debts are paid on time
- Avoid guaranteeing any debts that you cannot afford to repay.
Conclusion
A director’s guarantee is a binding contract that can have serious implications for your personal finances. If you are considering signing this guarantee, it is important to seek professional advice to ensure that you fully understand the risks involved. These risks can include personal liability for company debts, the potential loss of personal assets, and even bankruptcy. Before committing, take the time to assess whether you’re truly in a position to take on that level of responsibility. You should also consider other options for financing the company that may not require a personal guarantee. Exploring alternatives could help safeguard your financial future while still supporting your business goals.
