Should You Sign a Director Guarantee?

One of the advantages of being a limited company is that if the company runs into financial difficulties, you are shielded from any personal liability that the company incurs – unlike sole traders or partnerships, where you will be personally liable for company debts.

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In practice, it’s more complicated. If you need extra finance for the business, often the credit company may place a condition on the loan that you or the shareholders sign a directors guarantee. This means you and other directors will become liable for the debt if the company is unable to repay it.

Should You Sign It?

If you feel uncomfortable signing a director guarantee, it may be worth taking a look at other options and see if you can arrange funding from another source or find an alternative lender.

What Do You Need to Look Out For?

When the director guarantee is called in, it’s likely that the lender will want to take early action to make sure they have a good chance of recovering the outstanding debt. If the directors’ guarantee has been signed by more than one director, the agreement is that each shareholder takes a share of the liability proportionate to their shareholding. These directors’ guarantees are usually joint and several, so if other directors don’t pay what they owe, then you become liable for the share of the debt owed by other directors.

What Happens When the Directors Guarantee Is Called In?

If the amount outstanding is not repaid after several attempts from the lender to arrange for the settlement of the debt, then they can arrange a Statutory Demand against you, If this is not paid within 21 days, the creditor can arrange bankruptcy proceedings or apply for a county court or high court judgment.

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What Are the Benefits?

Arranging a director guarantee means you are more likely to secure the funding that your business needs to grow. Arranging extra funding in some cases may be vital to the survival of your business.

Make Sure You Understand the Risks

If you are considering taking out a directors’ guarantee, make sure you have understood the full implications of the risks involved. You can read more about what is involved in this article here:

If you need advice on arranging the directors guarantee, speak to experts who can explain to you the whole legal situation and can tell you the best way forward to minimise the risks.

Although the directors’ guarantee could secure the funding you need, it could also put your home at risk and make you personally liable for the company’s debts, so you need to make a careful decision as to whether you want to sign or not.

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