Directors Personal Guarantees

When providing borrowing facilities to limited companies most lenders will require a personal

guarantee from the director. If there is more than one director then it is very likely that all will be

required to sign, thus making the liability ‘joint and several’. This means each director will be liable

for the full amount of the guarantee and not what they may consider to be their share. Guarantees

are taken to ensure that directors cannot just walk away from a failed company – that they have a

vested interest in making it work.

Should the company fail the lender will make formal demand, to each guarantor, for repayment for

the full amount of the guarantee. Naturally a lender cannot recover more than they are actually

owed and assuming all guarantors pay, then any surplus funds are returned.

Bankers have always considered guarantees the easiest form of security to take but the most

difficult to realise. Unsurprisingly guarantors will go to extraordinary lengths to try and avoid having

to make payment. The actual wording for guarantee documents has evolved and developed over

many years. As loop holes have been discovered so new clauses have been introduced which means

that it is now very difficult for a guarantor to escape paying.

Clearly even if the bank has other security the very real danger is that personal assets can be put at

risk if a guarantor is required to pay up. This could easily result in pressure being brought to bear to

dispose of personal property or other assets to satisfy the liability. Even if the lender is unable to

force a sale of property (as they do not have a legal charge) they could nevertheless place a Charging

Order on the property which means the liability would have to be cleared should the property be

sold at some future date.

It is therefore essential that company directors fully understand the full implications of signing such

a document and are strongly advised to seek professional advice from their lawyer. It is now possible

to mitigate, at least partially, the liability by taking out a Directors Personal Guarantee Insurance

Policy. This is a new type of insurance that has only recently been launched – please follow this link

for further information (http://www.sljfinance.co.uk/useful-information/directors-personal-

guarantee-insurance/)