Director guarantees: the pros and cons

A guarantee is a form or declaration a director can sign stating they will personally cover the debts incurred by a company, or those of an individual from the company of which they are a director.

What is a guarantee and how does it affect me?

If you hold the post of director of a limited company, then limited liability exists for the directors. If the business were to fail and fall into administration, you would not be liable for any debts even if unpaid bills had mounted up and the company failed to pay. A guarantee is a declaration that a director can personally sign, stating that they will be liable for the debts of a company in which they hold the post. Director guarantees are routinely required by a bank or finance company in order to obtain loans.

When should I seek legal advice?

It is necessary to seek legal advice before entering into any sort of agreement. It is important to have the wording checked by a legal professional and to understand precisely what you are signing up to. Legal and financial advice should be sought before signing a director guarantee and again if the business begins to experience difficulty and legal action looks set to be initiated.

Independent legal advice can be obtained from a range of professionals who offer this service. Business start-ups nevertheless are still thriving despite the downturn in the economy and there is no reduction in the number of people being appointed to company director posts. According to the Business Secretary Jacob Rees-Mogg has widened eligibility for the £884 million loan scheme to businesses trading for up to three years which is good news for those seeking finance options.

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What are the disadvantages of a director guarantee?

One of the risks for directors signing up to a guarantee is that interest charges on debts can accumulate. Signing the guarantee means that directors who are in a fledgling business may find themselves having to sell their family home to pay back creditors under the terms of the arrangement. Unfortunately, in this situation, bankruptcy can occur. Furthermore, the director can still be pursued long after leaving the role if unpaid debts remain. You will be unable to be appointed as a company director without permission from the court.

Can I be taken to court under the guarantee?

If the company is unable to pay back the debt, the creditor can take a director to court under the guarantee. If you are unable to pay, this will ultimately lead to a negative impact on your credit rating. The creditor may also want the judgment enforced and assets can be seized.

Beware of extra costs and charges

A guarantee may include costs and charges of which you may not have been fully aware when signing the document. This can include interest on debts. You may have signed the agreement without having read all the terms and conditions but when you’ve agreed to the guarantee it can be difficult to remove yourself from it. The excuse that you haven’t read it will not stand up in court.

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All this unavoidable pressure can put significant stress on family relationships, especially if a wife or husband has co-signed the guarantee. It’s also important to be aware that the interest level on large accumulated debts can soon escalate and spiral out of control. Make sure you are armed with the necessary information and are aware of the potential risks involved in signing a guarantee. Above all, seek legal advice before signing anything.

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