Should I sign a director’s guarantee
One of the main attractions for people to set up limited companies is the concept of unlimited liability. Unlike when you’re a sole trader or a partnership where you are personally liable for the payment of all debts, theoretically unlimited liability under a limited company umbrella shields you from any personal liability the company incurs (with some exceptions).
It doesn’t really work out that way in practice however. If you’re looking for finance to grow your business or to bring in new machinery or hardware, one of the conditions the credit company may place on offering support is that you (and your fellow shareholders) take a director’s guarantee (or personal guarantee).
What are director’s guarantees?
A director’s guarantee makes you (and your fellow directors) completely liability for paying off any outstanding amount of debt if your company can not (or is perceived not to be able to) settle that debt. A director’s guarantee can be unsecured or secured (normally a fixed charge over a director or shareholder’s home).
For a business loan, it may be advertised as an unsecured loan – in other words, you don’t need to offer your house as collateral to access the finance. Depending on your individual circumstances though, a director’s guarantee may, in effect, put your home at risk if the lender later applies to take a charge over your property.
When are they asked for?
Director’s guarantees are often asked for by your bank or finance company on any loan applications you make. Invoice factoring and finance providers also use them as do trade suppliers and asset leasing companies.
It is not unheard of for commercial landlords to insist on a director’s guarantee on property leases.
Do you really need to give a director’s guarantee?
No-one is going to force you to sign a document which requires you to give a director’s guarantee. It may well be worth looking for other providers of funding or different landlords to get what you want.
For every invoice factorer out there demanding you sign over all your accounts receivables with a director’s guarantee, there are others who provide non-recourse factoring (that is, they don’t chase you for the debt if your customer goes bust or refuses to pay) and these factorers have no intention of asking for a personal guarantee.
Under what other circumstances can my director’s guarantee be called in?
Director’s guarantees may be called in prior to your business becoming insolvent. Your lender or your landlord will want to make any claim as early as possible to ensure they have the best chance of an easy recovery of money from your limited company.
Lenders or landlords may be able to activate director’s guarantees if the terms and conditions of the original agreement which gave rise to the director’s guarantee are not followed.
The awarding of a county court judgement against your business may also prompt your these companies into action.
There are so many potential ways that a director’s guarantee can sting you later on. That’s why you should do everything you can to negotiate before signing anything – there’s more about that later in this article.
What happens if more than one director gives a director’s guarantee?
If director’s guarantees are required, it is almost certain that every shareholder will have to agree to take one and agree to a proportionate level of liability equal to their shareholding.
When this is the case, under most circumstances, the director’s guarantees are joint and several.
So, for example, if there are three of you, your personal guarantees are called in, and your two fellow directors do a disappearing act, you are then liable for all outstanding monies.
What happens if they call in a director’s guarantee?
If, after repeated requests for payment of the arrears or the repayment of the entire amount outstanding, your lender or landlord does not get what they want, they will generally issue a Statutory Demand against you. If you don’t pay what is being asked for within 21 days where there is no ongoing dispute, your creditor can:
• start bankruptcy proceedings or
• apply for a county court or high court judgement.
If they go for the latter option, they may either try to send the bailiffs in or apply for a charging order which will secure the debt against your home. If your creditor deems that there is enough equity in your home to pay the debts off, then, after being granted a charging order, they may then apply to the Court for an order of sale, which will force you to sell your property.
There are no nice ways situations like these end.
What points should I try to negotiate before signing a directors’ guarantee?
There are a number of approaches you can take, including asking for the loan to be secured on a debenture than via a personal guarantee.
Burton Beavan note – a debenture gives a lender the right to all of the assets of your business in the event that your company can not pay the loan back.
You may try to negotiate a specific sum that you will cover with your director’s guarantee rather than all outstanding monies.
You can also try to insist that the lender or landlord will attempt to liquidate all your business assets to recover money before asking you to make up the shortfall.
For example, if you’ve taken out an asset lease and there’s still three years’ worth of payments left on it, you could ask them to bill you for the amount outstanding less whatever the company can sell the asset (which they would repossess) for in the open market.
PLEASE take legal advice before you sign anything.
Can I protect myself in the event a guarantee is called in?
There are three ways to protect yourself, other than negotiating hard before signing the director’s guarantee.
First, there is a form of insurance you can take out which pays off director’s guarantees in the event they are called on. It is currently only being offered by one insurer. Burton Beavan is not permitted to give advice on insurance products. We do not recommend this product (or any other insurance product) and its appearance on our site is not an endorsement. The company is called PGI Cover. If you click on this link and subsequently make a purchase, Burton Beavan receives no compensation – we have no relationship with this supplier.
Second, your lender or landlord may be open to negotiation. Try to make sure you seek professional help before something occurs which may trigger a call-in of a director’s guarantee. Your advisor can then begin to mediate with your creditor before action is taken.
Third, if your creditor is not being helpful or responsive, you may wish to approach a solicitor to check that all aspects that led up to your signing the director’s guarantee are legally enforceable.
All three of these options cost money and are not guaranteed to produce a favourable outcome for you.
Director’s guarantees put shareholders at a great deal of risk. Please be very careful before entering any agreement with a lender or a landlord which requires one. Make sure you shop around as many of your potential lender or landlord’s competitors will not require one.
Call the team on 01606 333 900 or email us at email@example.com.