The rise of the guarantee

It used to be the case that personal guarantees were only requested from directors or shareholders in a limited amount of circumstances; a company operated by a sole shareholder without a trading record, for example. However, over the last ten years as the lending market has changed, we are increasingly seeing requests for personal guarantees in lending arrangements, some commentators noting that lenders are aiming for “risk free lending” backed by a personal guarantee. 

What is a guarantee?

A guarantee is a promise to satisfy the obligations of a third party if they fail to do so. You may have been asked to give a director’s guarantee, that is, a guarantee to meet the obligations of your company. Those obligations may be to a lender, a supplier or a landlord.  While your company retains the primary obligation to discharge the debt (or pay the rent, or satisfy invoices, as may be applicable), if the company fails to meet these obligations you could become personally liable under the guarantee. 

Is my guarantee secured or unsecured (and what does that mean)?

If you have not been asked to give a charge over any of your assets, then you most likely have an unsecured guarantee. However, in some circumstances a creditor may ask for security over assets in support of a guarantee, for example, over property, vehicles or cash in an account. This would give the lender additional rights to seize those assets to recover any outstanding amounts; you should consider carefully whether you wish to give security over assets such as a family home. 

When are guarantees commonly requested?

Creditors may ask for a guarantee where they have doubts about a company’s ability to meet a financial obligation, common situations include:

• in the case of a start-up company
• if revenues into the company are small or still not regular 
• in support of a commercial lease of a premises

What should you look out for if you’ve been asked to give a guarantee?

• ask the creditor if you can limit your liability under the guarantee to a specific amount (rather than an unlimited amount)
• ensure you are aware of what the guarantee is securing, e.g. instead of all debts of the company owed to the lender, it could be in respect of a specific debt only
• if you are also charging an asset, limit the creditor’s recourse only to the value of that asset 
• consider taking out a personal guarantee insurance policy
• be aware of the continuing nature of the guarantee – the guarantee may continue even if you leave your position as director of the company – agree with the creditor up front if you resign as a director of the company that the guarantee will no longer be enforceable

You may want to seek legal advice to discuss the liabilities under the guarantee in more detail. 

My fellow director has been asked to give a guarantee too – what is the impact on me?

If a creditor has asked for a guarantee from one or more directors, typically creditors will make sure obligations are owed “joint and severally”. This means that the creditor can pursue the full amount of the shortfall from any one or all of the directors personally (i.e. it does not mean they have to pursue the directors on a pro-rata basis). Some directors will therefore agree with their fellow directors that if they are pursued for the full amount by a creditor, that the other directors will reimburse for some of those costs. 

Does giving a guarantee impact my directors’ duties?

Even if you have given a personal guarantee, you need to make sure that you are still acting in the company’s best interests in decision-making.

If the board is considering a matter involving the company’s finances or creditors, it is best to disclose that you are interested or potentially conflicted in the transaction due to granting the guarantee, and follow the company’s procedures when it comes to conflicts (some companies allow conflicted directors to participate in a vote, whilst others may require them to abstain or require shareholder approval before participating).

Other conflicts may arise if a company encounters financial difficulties; a director could be considered to have breached their director duties if it could be shown that they prioritised paying off a creditor to avoid incurring liability under a guarantee.