Personal Guarantees And How To Protect Yourself With A Deed Of Contribution

Many lenders will require you to take legal advice before signing. This is to ensure that you understand the nature and implications of the guarantee, risk to your own personal assets and ensure you are entering into it of your own free will and without coercion. Even if they don’t, there are variables with each guarantee which should be carefully considered including:

1) Any limits on your liability
2) What happens if you cease to have control or influence over the company
3) How you can bring an end to or terminate the guarantee
4) The debts and liabilities the guarantee relates to
5) What happens where there are multiple directors/shareholders

Getting legal advice on the guarantee before entering into it ensures that you know where you stand on these aspects as well as your exposure. Entering into any legal relationship should be done with your eyes open and with confidence in what you are committing to – especially when you are putting your own assets on the line.

Where you have multiple directors or shareholders giving a guarantee, liability is usually still ‘joint and several’. This means that the lender can pursue any one of you for the entire debt (subject to any agreed limitations of liability) and there is no need for them to claim against all of your or exhaust other avenues first. Often, they will pursue all avenues simultaneously or may pursue one avenue in particular if they consider that to be the one with the best chance of recovery. That could be you.

Most lenders won’t allow you to split liability between you, but you can do a Deed of Contribution between the individuals giving the guarantee. Where you enter into a properly drafted Deed of Contribution, the Lender can still pursue you for the entire debt (and if the guarantee is enforceable you would still have to pay them) but you can then require the other individuals to contribute to the money you have paid out and recover from your co-directors/shareholders. This is usually proportionate to your Shareholding but may vary depending on what you agree. This is one way to balance the risk associated with a guarantee and reduce your personal exposure.

Call us today on 0800 088 6004 to talk to one of our Specialist Team.