Personal Guarantees: Are they really “Just a standard document and nothing to worry about”?
As a director of a limited company, it is considered standard practice for lenders and other third parties to request that you sign a personal guarantee. This is an agreement whereby you personally guarantee to be responsible for the company’s debts if it fails to pay them. By signing a personal guarantee you are putting all of your personal wealth and assets at risk if the company defaults or does not pay any sum that is due. Therefore, a decision to enter into a personal guarantee should not be taken lightly and should only ever be taken after you have taken independent legal advice.
Some things to consider before signing a personal guarantee:
- Personal guarantees are not just asked for by banks and lenders in formal documentation, they can also be ‘hiding’ in documents such as property leases; trade supply terms; asset lease arrangements and invoice financing arrangements
- Look at alternative options – is there a better route?
- Seek independent legal advice – you are taking a very serious financial risk so professional legal advice is essential
- Do you understand the full ramifications of the agreement? Often your personal liabilities go far beyond the ‘headline figure’. They commonly include not just the principal amount, but all sums that the company owes the lender, such as interest, fees, commission, costs and expenses. Therefore you could be liable for substantially more than you think
- Carefully consider how confident you are that the company will be able to perform its obligations now and in the future
- Remember that all of your personal assets will be at risk – your home, your savings, your investments, your assets, everything!
- Even if there is more than one guarantor, a guarantee will normally be drafted on a joint and several liability basis. This means that the lender can decide to pursue just you for the full amount due
- It is also vitally important to consider the fact that the guarantee may well continue after the loan has been repaid in full, even if you sell the company and/or resign as a director, or on your death. Therefore, always get them formally terminated when the time is right.
The risks involved and the considerable considerations needed mean a personal guarantee is never “just a standard document and nothing to worry about”. You should always take independent legal advice before entering into one.
James Peterson, partner