The risks of signing personal guarantees for directors

---

Directors of companies are often asked to sign personal guarantees.

The most usual requests are from financial institutions providing loans, mortgages or overdrafts to the company but more recently they can be requested by landlords as additional security on long term leases or from suppliers of goods and services to the company.

If a personal guarantee is to be given every effort should be made to limit exposure.

Some suggestions would be:

• Exposure is limited to the percentage shareholding in the company.

• Avoid if possible having the spouse as a business partner as this would protect the family home.

• Request a time limit on the personal guarantee.  This is quite relevant to start ups as most business failures occur in the first three years.

If the company fails, any attempt by the Director to reduce or remove a personal liability on debts with a personal guarantee attaching can be viewed by a liquidator or receiver as a criminal act.

They can look at all transactions for a two year period prior to liquidation and if a fraudulent preference exists they will look to have the monies repaid to the company and the personal guarantee can then be enforced against the Director.

In addition further legal action can be taken against the Director by the liquidator for fraud or reckless trading resulting in unlimited liability and criminal sanctions.

Finally if a company defaults or becomes insolvent and the personal guarantee is relied on the creditor would normally in the absence of arrangement, obtain a judgement and then enforce it.

Some of the options and effects of enforcing a judgement include:

• Damage to credit rating.
• Placing collection of the debt in the hands of the Sheriff and possible seizure of goods.
• Attachment to debts owed to the guarantor.
• Judgment mortgage attaching to any property held by the guarantor.
• Instalment order can be granted by a Court and if it is not adhered to could result in further summons.
• Bankruptcy could result if the Sheriff cannot seize goods and the creditor issues a bankruptcy petition to have the guarantor declared or bankrupt.

Personal guarantees are now a fact of business life so great care should be taken when they are asked for and legal advice should always be sought in advance of signing.

For further information please contact Jimmy Dolan, Partner OSK

Share this Post