Let’s begin by looking at why a company might need a director’s guarantee. New companies and SMEs that have not been able to create a strong trading history and credit rating may find it difficult to rent properties or enter into arrangements with suppliers; therefore, to get around this problem, directors may have to look at offering personal guarantees.
Directors may need shareholders to agree to any changes to the company
What is a director’s guarantee?
A director’s guarantee is a declaration from the specified director that they will cover the debts of the company if it is unable to pay them. Correctly drafted, such a guarantee can be enforced easily and debtors will be able to pursue the director through the courts. The debt may be small, or it could involve a significant liability. Directors may be required to put their personal property and assets up as security to obtain the loan or commercial arrangement.
It is important that you understand the obligations of the director’s guarantee and obtain legal advice from a specialist such as https://www.parachutelaw.co.uk/director-guarantee.
What happens if the director in question resigns?
It is important to understand that simply resigning from the company will not automatically release you from the obligation you have signed up for. Unless the guarantee explicitly includes a clause that releases you on resignation or the debtor specifically absolves you from liability in writing later, your liability will continue. If you have provided a personal guarantee, it is important to remember that the company is a separate legal entity.
If the company is in a solid financial position when you resign and your guarantee is not seen as crucial by the debtor, the release from your liability may be easier to negotiate. When it comes to transferring your liability to another director, you will need the debtor’s consent, and they will need to be happy that the transferee has the same quality of assets.
Understanding the complexity of a directors guarantee is not straightforward, which is why independent legal advice is strongly recommended.
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