A director guarantee is a legal commitment where a director agrees to cover company debts if the business cannot meet its obligations. While it can be essential for securing credit or contracts, it places the guarantor at personal financial risk, making it vital to understand the potential implications.
What Is a Director Guarantee?
A director guarantee is a promise to repay company debts if the business defaults. Often required by lenders, landlords or suppliers, it provides additional security for creditors. However, this agreement exposes the director’s personal finances, including assets, to liability if the company fails to meet its commitments.
Key Risks of a Director Guarantee
The main risks include unlimited liability and joint and several liability. Investopedia explains what unlimited liability is. In “all monies” guarantees, directors may be responsible for debts beyond the initial agreement, and creditors can pursue any guarantor, often targeting the one with the most assets, regardless of their involvement or contribution.
Does Resignation as a Director End Liability?
Resigning as a director does not automatically release you from a director guarantee. This obligation remains active unless a formal release is obtained from the creditor. Without it, you could be pursued for debts even years after leaving the company.
How to Minimise Risks
To minimise risks, seek legal advice before signing a director guarantee and negotiate terms to limit your liability. For instance, capping the amount or excluding future obligations can provide better protection. You can consult Parachute Law for guidance on managing these risks effectively.
Contribution and Co-guarantor Rights
If you pay off a debt as a guarantor, you can seek contributions from co-guarantors to recover their share. However, this process can be challenging if they lack assets or refuse to cooperate, underscoring the importance of assessing co-guarantors’ financial stability beforehand.
While a director guarantee can facilitate business growth by securing vital credit or agreements, it carries significant personal risks that should not be underestimated. Guarantors expose their personal assets to potential claims, making it essential to fully understand the terms and implications before signing.
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