Director's Guarantees

Posted 15th February 2012

Written by Malcolm Jones

If an SME company can find a bank to lend to it the directors are likely to have to give personal guarantees. The bank will usually insist the director has independent legal advice on the guarantee before it is signed.

What are they?

A guarantee is a promise by a director that if their company fails to do something the director will do it instead. Usually it is the company´s failure to pay money when it is due that brings the guarantee into operation.

Although many guarantees are to give security to lenders to the company sometimes a supplier will ask for a guarantee before delivering goods or services.

Why have one?

A guarantee removes some of the advantages of having a limited company at all. Often an important reason for trading through a limited liability company is to separate the director´s personal assets from those of the business.

The directors may, reluctantly agree to give a guarantee if there is no other way of the company getting the loan or supplies it needs or, sometimes, if the guarantee means the company is offered better terms.

The disadvantages of director´s guarantees

The obvious danger is that the director has to pay up under the guarantee. As this will only happen if the company is in difficulties it will come at the worst possible time when the director´s income is under threat and business is on its uppers.

The worst case scenario is that through signing a personal guarantee the director loses their home and is made bankrupt.

Another disadvantage is that a director may become tied to the company. It is bad enough risking everything for a company under your control but far worse if the company is being run by someone else.

Common terms

  1. The directors will undertake to pay the bank the amount of any shortfall by the company. Usually this is limited to a certain amount although even then this can be increased by interest charges and costs.
  2. If there is more than one director the liability will usually be joint and several. This means the bank can sue any of the directors for the full amount and doesn´t have to pursue each of them for their share of the total.
  3. The guarantee will usually be for ´all monies´ due from the company to the lender. As such it will cover new or increased borrowing as well as the new facilities at the time it is signed.
  4. The bank will normally be able to require payment ´on demand´. This can cause problems even for wealthy directors if their funds are tied up elsewhere.
  5. Other provisions to prevent the lender losing its rights on technical grounds surrounding the way the guarantee is signed or future changes.

Entering a director´s guarantee

The bank will normally insist that the directors take independent legal advice on the guarantee. This ensures they know the meaning of what they are signing, the risks they are running and that they are not being pressurised at the time it is signed.

It is the bank that benefits from the director´s taking legal advice as it means it is more certain to be able to enforce its guarantee. Nevertheless it is the director, not the bank or the company, who has to make the arrangements, be told what a guarantee is about (even if they know anyway), discuss their financial affairs and then pay for it all.

The courts have provided guidance to solicitors on the ´minimum standards´ for the advice has to be provided. A five minute chat is not enough – the director has to be seen on their own, an individual files opened and ID produced – all to help the bank enforce its security.

At Newtons we can help directors with:

  • satisfying their bank´s requirements for independent advice;
  • preparing guarantees if you are lending money or supplying goods; and
  • advice if you are unfortunate enough to receive a demand for payment under a guarantee.

For more information contact Malcolm Jones on 01423 789 059 or malcolm@newtons.co.uk

 

This article is for general information only. No responsibility can be accepted by Newtons Solicitors for any loss suffered by anyone acting or refraining from action as a result of anything on this website. We recommend you take independent legal advice in relation to any particular personal guarantee.