A personal guarantee (PG) is a legally binding contract in which the guarantor undertakes to satisfy the contractual obligations and liabilities of a debtor to a creditor. If the debtor company fails to satisfy any contractual obligation (for example, by defaulting on payment), the guarantor can be called upon to discharge the liability or obligation of the debtor company to the creditor.
So what happens to the guarantee if a director leaves the company?
Will resigning as a director or selling my shares terminate my PG?
No, unless the PG expressly says that ceasing to be a director or shareholder releases the guarantor from the PG (which is very unlikely). It is more usual for a PG to state that the guarantor is only released when the creditor says so in writing.
Resigning as a director without getting a release might put the guarantor in a worse position than remaining in office. As a director, the guarantor will have some say in how the company operates which might impact potential liability under a PG. Once a director resigns they no longer have any powers in relation to the company but are still liable under the guarantee for the company’s obligations they have guaranteed.
How do I get a release from a PG?
- By Agreement with the creditor – The creditor may be prepared to accept a replacement guarantor or other security from the debtor, although the release may only take effect from a specified date. It is vital to consider obtaining a release from any PG when exiting from the debtor company.
- Revocation – It may be that the PG was procured by fraud, undue influence, misrepresentation or forgery. If these factors apply, they may give a defence to a claim for payment under the guarantee.
- Discharging the liability – Paying all of the outstanding liabilities under the PG will generally discharge it and release the guarantor, although the release may be conditional for a period of time before it becomes final.
Can I limit my liability under a personal guarantee?
Possibly. PG’s are sometimes limited to a specified amount plus payment of any costs and interest accrued. A PG may also contain provisions for cancelling the guarantee. However, such a clause will usually provide that the liability is fixed at the balance owed when the cancellation takes effect, and the guarantor is liable to pay that amount (if ever demanded).
I am a joint guarantor with others. Is the liability proportioned equally between us?
PGs are normally drafted so that all guarantors are jointly and severally liable for the monies or obligations owed. This means the creditor can pursue all or some of the guarantors to recover the money owed and it is not a defence that you have paid your share, (unless there is an express agreement with the creditor).
A guarantor who pays any sums on behalf of another guarantor does have a right of contribution from any non-paying guarantors, for any sum paid above and beyond their ‘share’. For example, two guarantors are jointly and severally liable to pay £100,000. If one paid £100,000 to avoid additional costs and litigation, that guarantor could pursue the other to recover £50,000. Guarantors who pay the creditor can then claim against the company for the sums they have paid to the creditor.
Independent Legal Advice (ILA)
In most cases a lender will for its own protection, insist a person who is a guarantor receives ILA before accepting the PG and making a loan. The purpose is to minimise the risk of a defence of undue influence being raised to avoid the guarantee. In some circumstances, a PG may be unenforceable where a guarantor has not had ILA, although in the case of a director who gives a guarantee, that is a harder argument to make than for a non-director guarantor.
Final thought
Giving a PG for the debts of a company takes away the limited liability protection that a director or shareholder would normally have, so should not be entered into lightly or without getting independent legal advice (even if the lender does not insist on it). Once you have given the guarantee you are bound by it so it makes sense to understand exactly what it is you are committing to, given the serious financial and personal consequences if you cannot discharge it.
If you have any further questions regarding personal guarantee please feel free to contact our Corporate Team.