The use of a directors personal guarantee is becoming more and more widespread. But what exactly is it, who is it useful for, and what are the obligations of those who sign?
What is a directors personal guarantee?
A directors personal guarantee is essentially a legal pledge by a company director that makes them personally liable for any debts that their company cannot pay. These guarantees can be useful from two perspectives.
1. Protecting yourself when trading
Generally speaking, a limited company and its directors are regarded as separate legal entities. If a limited company were to go bust, the debts of the company are dealt with by the liquidators in a set order. This means that creditors may or may not get the money they are owed.
A directors personal guarantee means that any debts essentially become ‘personal’, and it becomes the responsibility of the director to pay them from their own pocket should the company be unable to.
Expert help
If you want to know more about what a directors guarantee entails, or need help drafting one, specialist solicitors such as Parachute Law can offer advice and guidance.
2. Accessing business loans or funds
If you are a director yourself, signing a directors guarantee with a lender will give you access to funds that you may be unable to access through the business directly.
How long do the obligations last?
What many do not realise is that, theoretically at least, the obligations can last forever. This is because the company may well continue trading after the director in question ends their involvement. Quitting as a director does not usually nullify the legal obligations agreed via a directors guarantee.
It is therefore very important to understand what you are signing or asking others to sign.
