Can you avoid a director’s guarantee?

With a limited company, there is often the need for a director to provide a directors personal guarantee. One of the main benefits of a limited company from the director’s point of view is that if the company fails to meet its obligations, the directors are not personally liable. However, this means that third parties will often seek to gain a directors personal guarantee to offer them security, particularly if the contract is lengthy or could potentially be valuable, such as a lease or a bank loan.

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Entering into a directors personal guarantee

Directors, as set out on the register at Companies House, will be those individuals who are responsible for the management of the company. They make the day-to-day decisions.

However, it should be noted that whilst a third party may wish for all the directors to sign a directors personal guarantee, it may not be the case that all of them are fully aware of the financial position of the company to the same extent. Also, care needs to be taken by the directors to ensure that they are complying with their duties and that they are fully aware of all of the liabilities, particularly if they are guaranteeing such liabilities.

A directors personal guarantee will be linked to one specific transaction – for example, a lease or a bank overdraft. Whilst the bank may seek to ensure that the guarantee extends to all directors, a director cannot accidentally find themselves in a personal guarantee situation, and they would have needed to have entered into the agreement themselves. If they have not done so, then the validity of the personal guarantee can be questioned.

Independent legal advice should also be provided by a registered solicitor such as https://www.parachutelaw.co.uk/director-guarantee. This will involve the director having full knowledge of the guarantee, and the scope of that guarantee.

Avoiding a directors personal guarantee

One option is to take out insurance. This means that if you are called upon, the insurance company will assist with a certain percentage of the amount guaranteed. This is not so much avoiding the guarantee but rather mitigating the damage.

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Another option would be to look at the actual construction of the guarantee – was the contract enforceable in law, does it have certainty, and has it got the necessary contractual elements such as offer and acceptance?

Negotiating a settlement is a third possible option.