Advising Directors on Personal Guarantees

Advice for directors on personal guarantees

No director should give a personal guarantee without first getting legal advice on the potential consequences. Once this sort of guarantee is given, that director is then personally liable for the debts and liabilities of the company; the limited liability status that comes with incorporating a business cannot change that. The consequences could be disastrous if you sign up to a personal guarantee without fully understanding and accepting the risks involved.

At Eric Robinson Solicitors, our specialist business lawyers can offer a wide range of legal services and support regarding directors, their duties, and Director Personal Guarantees. We can act as your Independent Legal Advisor, providing specialist advice and guidance on the implications of your personal guarantee before you sign to ensure you fully understand its terms. Taking appropriate legal advice before entering into any financial agreement can save you from costly disputes in the future and reduce the risk of bankruptcy.

The Business Law team at Eric Robinson Solicitors is fully authorised and regulated by the Solicitors Regulation Authority and is experienced in acting for Directors and business owners.

We can also enlist help from our specialist dispute resolution team should you need to bring or defend a commercial or contract dispute. We are experienced negotiators and tacticians and can help on a wide range of matters, including internal disputes between partners and/or directors and shareholders, or issues concerning liability under personal guarantees.

What is ILA?

If you are going through a commercial transaction, typically for matters that are financial in their nature, such as loaning money, you may have been told you require Independent Legal Advice (ILA). For business owners, ILA is usually required for: Director’s Personal Guarantees, Personal Guarantees, 3rd Party Mortgages, Occupier’s Consent to Mortgage and Employment Settlement Agreements. If your lender requires you to take independent legal advice before or when you sign the personal guarantee, we can help.

Can a director be a personal huarantor?

Yes. Directors of a limited company have limited liability, meaning that if the business were to go into liquidation or administration, those directors would not personally be liable for the company’s debts. However, a Director’s Personal Guarantee is a type of contract / declaration you may be required to sign stating that you will personally cover the debts owed by your company to a third party such as bank or mortgage lender.  In the normal course the guarantee will only come into effect if the company you were a director of goes into administration or, for whatever reason, fails to pay their debts to the person/company who requested the guarantee.  It is vital that you fully understand and accept the risks involved before agreeing to provide a personal guarantee. Our lawyers provide specialist Independent Legal Advice for directors on Personal Guarantees.

Is a director’s personal guarantee enforceable?

Yes. If the personal guarantee is drafted correctly and signed by the guarantor, it becomes a legally binding and enforceable contract. If your company becomes insolvent and you cannot cover the debts owed, the business or individual you are in debt to, could start legal proceedings against you personally. Consequently, this could result in serious financial problems such as bankruptcy or losing personal assets such as your home.

How can personal guarantees affect directors’ duties?

Under some circumstances, directors who provide personal guarantees may have restricted voting rights on specific matters subject to the Articles of Association due to potential conflicts of interest. If the company gets into financial difficulties, a director should not try and influence it to pay off a creditor to whom they have given a guarantee before other creditors. Any such preferential treatment would breach the directors’ duties and could be unwound by the court.

Do commercial leases need a personal guarantee from a director?

Not always, and if your company can provide adequate security, then this would be favourable. However, some landlords will insist on a third-party guarantee for a commercial lease. For example, your company may be unable to demonstrate you will be a reliable and financially secure tenant due to limited trading history and financial record. In that case, a landlord may require additional security. Under these circumstances, company directors are often required to sign a personal guarantee for compliance with lease obligations. If you are asked to sign a guarantee of this nature, you must fully understand your obligations under the commercial lease. Our experienced business law and commercial property lawyers can provide specialist advice and guidance on commercial leases and personal guarantees, ensuring you are fully aware of all risks and obligations. We can also help with the negotiation of lease clauses, such as time limits on the personal guarantee.

What happens to a personal guarantee if I resign as a director?

If you are resigning as a director and have signed a personal guarantee, your resignation does not automatically terminate the personal guarantee. For example, if the personal guarantee were for a company loan, you would still be liable for that debt under the terms of your guarantee if the company defaults on the repayments. You can request that you be released from the personal guarantee on your departure as a director. Ultimately though, the only way to be removed from a guarantee is to obtain the creditor’s permission and agreement on who will take your place as the new guarantor. However, this may not be straightforward if a company is being sold or not financially stable. Before you resign, especially if you have signed a personal guarantee, we recommend you seek early legal advice. Our experienced business law team can help you understand the procedure, your obligations and the risks involved.

What happens to a personal guarantee when someone dies?

What happens to a personal guarantee when someone dies?

If you have provided a personal guarantee to cover business debts, your death will not automatically discharge the obligations under the guarantee. Any sums due under the guarantee could be placed as a prior charge on your estate, and your loved ones will be unable to complete the probate process until such guarantees have been cancelled. Before signing a Personal Guarantee, it is vital that you obtain independent legal advice so you fully understand what you are agreeing to.

Can you help in disputes surrounding personal guarantees?

Personal guarantees are legally binding contracts, and challenging their validity is a complex area of law. However, our highly experienced business law team and dispute resolution lawyers can help directors if they need to challenge a claim from a creditor seeking to enforce a personal guarantee. We deal with every dispute with resolution in mind. To us, that means getting you the best possible terms as cost-effectively as possible and with finality. And if we need to involve the courts, then our team has all the knowledge and experience you will need.

Does a personal guarantee need to be witnessed by a solicitor?

In most cases, it is a requirement that company directors or shareholders have their personal guarantees witnessed by a Solicitor. Typically, the Solicitor will also be required to confirm in writing to the lender that independent advice has been given and the risks of signing the guarantee have been adequately explained to the guarantor and understood. Even if you have not been advised to seek legal assistance, due to the risks associated with any Personal Guarantee, you should always obtain full and proper independent legal advice.

How can our Solicitors help?

We have the expertise required to act as your Independent Legal Advisor, helping you fully understand what you are agreeing to, making amendments to the agreement as necessary and, negotiating terms where possible to avoid the potential for unlimited liability.

To speak to us and find out more, get in touch with one of our local branches at the following locations: Southampton, Hedge End, Chandlers Ford, Winchester, Lymington, or Richmond Upon Thames.