What is a director guarantee?
A director guarantee is a legal agreement where a company director personally agrees to repay a company’s debt if the business is unable to meet its financial obligations. This type of guarantee offers lenders additional security as the director takes personal responsibility for company liabilities if the business defaults. Director guarantees are commonly used in loan agreements and other financial transactions involving limited companies where the company itself may not have sufficient creditworthiness.
Why is a director guarantee needed?
A director guarantee provides creditors with reassurance that, in the event of a company’s insolvency or failure to meet its debt repayments, the individual director will step in to cover the amount owed. This is especially common for small or newly established businesses that may lack substantial assets or trading history to secure loans on their own.
By offering a director guarantee, a company director essentially pledges their personal assets as collateral. This can help the company obtain the credit or funding it needs to operate or expand.
While this may be a useful tool for securing financing, it also places the director at significant personal financial risk. If the business fails, the director may be personally liable for any outstanding debt, including the potential loss of personal property.
What should directors consider?
Before entering into a director guarantee agreement, it’s important for directors to fully understand the implications. Director guarantees are legally binding, and creditors are likely to pursue personal assets if the company cannot repay its debts.
This can include personal savings, property, or other valuable assets. It is strongly advised that directors seek independent legal advice before signing such agreements to ensure they are fully aware of the risks involved.
As the UK Government guidance explains, limited company directors are generally shielded from personal liability, but director guarantees are an exception to this rule. Legal professionals can provide advice on effectively managing the risks of a director guarantee.
By understanding the terms of a director guarantee and obtaining the right advice from legal professionals, directors can make informed decisions about their financial responsibilities.
