Directors and shareholders of limited companies are often asked to provide a Personal Guarantee in support of the company’s obligations. Anyone who is considering giving a Personal Guarantee in any capacity should think carefully before doing so and should ensure that they understand the risks and are able to make a fully informed decision.

Personal Guarantees are commonly set out in a standalone document and if given in support of a loan or overdraft facility lenders will often require the Guarantor to take Independent Legal Advice (ILA). However, not all lenders require ILA, and some forms of Personal Guarantee can be incorporated into a contract (for example, an obligation to be personally liable for the payments due from the company under a supply contract).

Whilst Personal Guarantees of course have a place and serve a valuable function in commercial agreements they create a continuing primary obligation on the Guarantor. Personal Guarantees are often given at a time when the company is performing well and growing. However, even where ILA is taken, memory of the advice may well fade over time leading to misunderstandings such as the following:

1. “As the director of a limited company I can’t be personally liable for the company’s debts.”

Directors of limited companies have limited liability which means that they would not be personally liable for the company’s debts were the company to be placed into liquidation. However, the position is different if they have breached the duties owed to the company or they have given a Personal Guarantee in support of the company’s obligations. 

2. “The Personal Guarantee doesn’t apply anymore because I resigned as a director and sold my shares”.

Resigning as a director and/or transferring a shareholding does not release Personal Guarantees. If the company fails to meet its obligations to the third party to whom the Personal Guarantee has been given then it will likely be enforced.

3. “The Personal Guarantee was for £200,000 and was given by four of us so my share is £50,000”.

Personal Guarantees are commonly joint and several. If your co-guarantors are unable to satisfy their obligations, you could find yourself facing a claim for the whole amount with serious potential personal consequences such as the loss of your personal assets and even your home.

4. “The company’s financial performance was declining so we paid off the loan secured by the Personal Guarantee as a precaution”.

In the event that the company is showing signs of financial difficulties a director should not prioritise payments to a creditor to whom they have given a personal guarantee since should the company become insolvent this would likely amount to a preference which would represent a breach of directors’ duties and likely be unwound by the court.

5. “When I gave the Personal Guarantee the overdraft facility was £50,000 so that must be the limit of what I have to pay”.

Whilst it is more unusual for liability to be unlimited this can happen especially when you are not dealing with a mainstream FCA regulated lender.

6. “I am owed money by the company so I can set it off against the amount of the Personal Guarantee”.

This is not the case – the Personal Guarantee is entirely independent of the financial position between the Director/Shareholder and the company.

7. “The Personal Guarantee died with the Director”.

Personal Guarantees are not discharged upon death and will fall to the Personal Representatives of the Guarantor’s estate to be dealt with. The Personal Representatives will not be able to complete the administration of the Estate without the Personal Guarantee being cancelled.

What can you do to mitigate this risk?

1. Never sign a Personal Guarantee unless you are confident that you fully understand the obligations.

2. Take care when signing contracts on behalf of a company that may give rise to personal liability.

3. Negotiate limits – preferably cap the guarantee at a specific amount or percentage of the liability.

4. Limit the scope – negotiate a clause that brings and end to the Personal Guarantee after a facility is repaid or certain conditions are met.

5. Seek a release when exiting the business whether as a director or shareholder.

We are always happy to have an initial discussion – please do get in touch with Isobel Milburn or Nick Marshall who can advise on potential steps to be taken to protect your position.

This article is for information purposes only and is not intended to amount to legal advice to any person on a specific case or matter.