A director’s guarantee is a form of declaration or personal guarantee that a director can sign to state that they are liable for any outstanding amount of debt the company can’t pay.
Directors’ guarantees are often asked for by banks or finance companies on any loan applications the company makes. They are also used by finance providers, trade suppliers, and asset leasing companies.
Before signing such a guarantee, it is vital that you are fully aware of your legal obligations. Let’s take a look at the obligations you have and the five things you really should know before signing a director’s guarantee:
1. If the company can’t pay, you are liable
When you sign a director’s guarantee, you are agreeing to be responsible and liable for any debts if the company cannot pay. It also means that should the company stop trading and have debts, you are liable for this too. Once you sign a guarantee, it becomes a legally binding contract.
Some guarantees include an all-monies guarantee or an all-monies clause. This means the guarantee will cover all amounts the debtor owes to the creditor under any arrangements. This can include future arrangements, regardless of how they arise.
2. Risk to personal assets
Your home may be at risk along with other personal assets. If your company can’t pay its debts, legal proceedings will take place against you to reclaim the debt owed under the director’s guarantee. If you cannot pay as a director, courts can rule to seek claims against your personal assets and have the ability to seize property, freeze bank accounts, or declare individuals bankrupt. It is vital you understand that your personal assets will be at risk if you cannot pay any outstanding debts made under the guarantee.
3. Joint liability
If a company has more than one director, all directors will be asked to sign a director guarantee; however, this does not mean that all will share responsibility for the debt. For example, if there were four directors and three fellow directors were unable to pay when a personal guarantee was called in, you would solely be liable for the outstanding debt. Liability remains until the debt is paid in full, regardless of whether it is paid by one or multiple directors.
4. Hidden costs and charges
A director guarantee can be highly detailed and complex, so it is always worth seeking professional advice. It is also likely to contain hidden extra costs and charges, which can include interest rates for unpaid debts and fees from debt recovery agencies for their part in the process. All legal costs may be included, which can be extremely expensive, as can the court costs incurred by all parties.
5. Continued liability
If you stop acting as a director or the company stops trading, it doesn’t mean that the director’s guarantee ends. Director’s guarantees are usually continuous and unlimited. Outstanding debts made under the guarantee need to be paid by those who agreed to it at the time.
Legal advice should always be sought before you sign anything. Only by being fully informed about the document you are being asked to sign can you decide whether it is in your best interest or has the potential to become your worst nightmare.