Are There Any Guarantees In Your Life?

A personal guarantee can be given to ensure payment of a specific loan. It can often be up to a certain amount to cover the outstanding loan balance.  However, even if the loan is paid off by the company, the guarantee could remain in force to cover future borrowings up to that amount… Alternatively, a personal guarantee can contain a clause known as an “all monies” provision.  This means that the person giving the guarantee can be held liable for an unlimited amount of money borrowed by the company from that specific lender, covering both existing borrowings and future loans and overdrafts.

If you are a director of a company (even if you are not the finance director or an active participating director of the company) the law states that you will be assumed to be fully aware of the liabilities of the company and even if you were not involved in taking out the loan you could still be held liable for it under a personal guarantee that you give.

There is no requirement, if you are a director of the company, for the lender to ensure that you take legal advice before you sign the guarantee,  as it is again assumed that you are fully aware of the financial position of the company and its liabilities before giving the guarantee.

It is often unavoidable, if you wish to borrow money in the company’s name, that you give a personal guarantee. This is because the finance company knows that if the company goes into administration or liquidation and has no assets to pay the outstanding balance, it would be unlikely to recover the money from the company.  However, if the company’s directors have given a personal guarantee, the lender can pursue the individuals involved.

Very often, the guarantee will be in the form of a joint and several liability. This means that if the guarantee is called upon (i.e., the money is demanded from the individual), the finance company can pursue the guarantor for the full amount due and owing.  It does not have to split the liability equally among the number of directors.  This may seem unfair, but in practice, we have often encountered situations where directors go bankrupt and leave their remaining dire ors liable for the outstanding balance under a guarantee.

We have tried to set out below the steps you can take to protect yourself before signing a guarantee:

1. What amount of money are you actually guaranteeing? Is it for a specific amount, or is the guarantee an all monies clause which means you could be liable for all the company debts taken out with that lender in the future?
2. Can you give notice and bring the guarantee to an end? It is always important that you think about what would happen if you left the company and resign as a director.  This does not automatically mean the guarantee comes to an end, and you should try to negotiate a clause stating that you can give notice under the personal guarantee to end your liabilities.  If you did give notice under the guarantee, it means you may be liable for the company’s debt on the day the notice period expires.  If the company fails in the future, you could be pursued for the amount that was owing when your notice period expired.
3. As we have outlined, a guarantee is normally a joint and several liability. This means that the finance company could decide to pursue only one director for all of the monies owing. This typically occurs when one of the directors has been declared bankrupt or has no assets.  The only way to prevent this is to have your fellow directors sign a “Deed of Contribution.” This records that in the event of the guarantee being called up you will all share a joint responsibility to pay an equal share of the outstanding money under the guarantee. This does not mean that you are fully protected, and it is possible that your fellow directors may not have the funds to pay their share of the debt.  However, it provides some form of protection and can offer you comfort in knowing that you share the burden equally of a guarantee being called upon.
4. If you resign as a director of the company, ensure that you can provide notice to the lender under the terms of the director’s agreement. If you sell a company and have given a guarantee, then you should obtain a warranty from the buyer of the company that they will indemnify you against any claims made under the personal guarantee (especially if there is no provision for you to give notice under the guarantee). Again, this will not fully protect you if the buyer has no assets and fails to make a payment, but you have tried to minimise the risk and brought the problem to the buyer’s attention. If the buyer refuses to give you a warranty, then it should start the alarm bells ringing and be a warning of a potential future problem.

We advise against giving a personal guarantee for loans taken out in the company’s name.  However, this is often unavoidable, especially if you have recently started a new business and the company does not have any other assets that can be used to secure the loan.

The only other alternative is that you give a debenture or floating charge over the company’s goods to the finance company.  Even if you do this, some finance companies will still insist that a personal guarantee is given.

If you are uncertain about signing a guarantee, you can contact us at Wilson Browne Solicitors.  David Farmer is a partner in the Commercial Litigation Team and is an expert in this area.  David can advise you on the steps you can take to protect yourself before you sign a personal guarantee.  Alternatively, if you receive a letter from the finance company demanding repayment of a personal guarantee, David can advise and take steps to defend your position or try to negotiate a reduced settlement with the finance company.