If you are a director of a company, it is almost inevitable that
at some stage you will be asked or required to agree to a
director's (also called a personal) guarantee.
As a director of a company, you may only be personally liable
for the company's debts and claims to the extent that you may
be in breach of your duties as a director. Except in circumstances
where you have entered into a guarantee on behalf of the
Third parties such as banks, landlords and suppliers will
invariably require directors of companies to guarantee that the
company will repay its debts or otherwise discharge its
So if the company is unable to meet its commitment, for example
in the case of insolvency, then the third party can pursue the
directors of the company personally.
While it is very common, and standard commercial practice, for
such third parties to require director's guarantees, directors
should be very vigilant and prudent when negotiating and entering
It is critical that directors fully appreciate the extent of
their exposure, how that exposure may be limited, and their rights
against the third party seeking the guarantee and indeed as against
Here are the top 5 issues to be particularly aware of:
Most guarantees are not limited in time. A guarantor's
liability is said to be "continuing" which means that the
guarantor is liable for any past, present and future obligations
owed by the company. The debt may be paid by the company at a given
date, but the guarantor will still be liable for any subsequent
indebtedness by the company.
Joint and several liability
Many companies have two or more directors. Guarantees are
therefore invariably sought from all the directors of the company,
who will be liable jointly and severally for the debt to the
creditor of the company. This means that the creditor is able to
recover against one or other or all of the guarantors, in its
absolute discretion, even if it has not exhausted all attempts to
seek recovery against the principal debtor. The creditor will
likely focus its recovery attempts on the guarantor with the
capacity to pay or personal assets, that is, real estate, which it
A director's guarantee does not cease when you
cease to become a director
A "directors" guarantee is really a
"personal" guarantee in that resignation as a director
does not mean that you are automatically released from your
obligations, particularly when the creditor does not know about the
We have acted in a number of cases where directors have resigned
from companies some years ago, thinking they were "off the
hook", only to find that they are the subject of a guarantee
claim years later.
Such claims can often be hard to defend. It is therefore
critical, when you decide to resign as a director of a company,
that you ensure you obtain a signed release of your obligations
from the creditor and any co-guarantors.
All monies versus limited guarantees
Guarantees are either limited to the extent of money advanced to
or owed by the company, usually a fixed amount, or they are
considered an "all money" guarantee, that is, the
guarantor's potential liability is unlimited and covers all
monies due by the debtor company to the creditor. This is often the
case with loans granted to debtor companies supported by
It is very important to get legal advice on this topic as such
clauses may not be entirely clear in the security documentation,
even if it is in plain English.
Right of contribution and subrogation
It is important to note that if one guarantor ends up
"holding the baby" in relation to any guarantee claims,
that guarantor can make a claim against any co-guarantors for what
is called "contribution", assuming such co-guarantor
assets have any money or assets.
Therefore, if you as a guarantor are subject to a claim because
you are the only one with assets in your personal name, then you
have a right to demand that any co-guarantors pay you their equal
share for the debt, for what this is worth. The moral of the story
here is not to have any assets in your personal
This is a highly technical area of the law even for lawyers and
the Courts, let alone individuals or company directors involved in
the hurly burly of business and contracts to sign. So you should
take nothing for granted, before, during or after you have entered
into a guarantee.
Please be constantly aware of your ongoing obligations and if
your situation or that of the company with which you are involved
changes at all, seek advice and take the appropriate action.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Do not depart from the contract terms, or encourage the other party to do so, unless you plan to alter the contract.
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