All directors of companies should think long and hard before giving a director guarantee since they may find themselves personally liable for any debt or liability which the company has accrued. Here we look at whether you should consider taking legal advice.
What are the dangers?
Officers of the company may be required to sign personal guarantees to cover loans, overdrafts or other potential debts such as rent payments or invoice finance. If they do so, any lender can use that guarantee to avoid formal insolvency if the company falls within that process
If you are pursued as a result of signing a director guarantee, you may have to sell your own assets, even your home, to settle the debt, or face bankruptcy.
Is a director guarantee enforceable?
Provided there are no legal issues when it comes to the drafting of the document and you have signed it, the guarantee will be enforceable and binding. In the event of insolvency and if you are unable to cover the debts, you may be subject to legal proceedings against you personally. At this point, your personal assets such as your home may come into play.
Another thing to consider at this point is that your position within the company may be affected. For example, restrictions may be applied to your voting rights on particular matters covered by the Articles of Association. This is because a conflict of interest may arise, such as if there is a particular creditor that you have personally given a director guarantee to.
What happens if I tender my resignation?
If you are a signatory to a director guarantee, simply resigning will not release you from this liability. Even in the event of your death, your estate could remain liable if there is a prior charge on your estate.
As you can see, legal advice from a specialist legal firm such as Parachute Law is crucial before you offer a director guarantee.
We strongly suggest that you take independent legal advice before deciding whether to sign a director guarantee.