Directors – Personal Guarantees
Directors – Personal Guarantees
If you are a company director, the likelihood is that your company’s bank will have asked for and you might have given it a personal guarantee (PG) by way of security for the privilege of opening a bank account for your company and/or an overdraft or loan facility that the bank makes available.
It’s not just banks that will ask for a director’s PG, landlords, suppliers and other creditors might do so as well. That is those who deal with the company but who require the security of a PG from you. I refer to such persons as “creditors” for the purpose of this note.
Bearing in mind that a PG will put your personal assets at risk, you should not consider giving a PG lightly.
The PG is effectively a promise by you to pay the creditor should your company fail to do so on the terms of the agreement that the company has with the creditor. If you fail to pay in accordance with the terms of the PG then the creditor will be free to obtain judgment against you and your assets to satisfy what is owed.
If your assets are insufficient to cover what is owed under the PG, then the creditor could consider making you bankrupt in which case you will not be able to act as a director without permission of the court.
Joint and several PG’s
If you are only one of the directors giving PG’s , the likelihood is that the PG’s will make you and your co –directors liable on the basis that the creditor can go against any one or more of the PG’s to the exclusion of others. If you have more free assets than your co-directors, then the creditor will more likely go against you for the major part of what is owed. You will then be left to seek contribution from your co-directors. Just hope that they are able to repay you. In my experience, they usually cannot or at least cannot do so in the shortness of time.
Added Security Requirement
In addition to your PG, the bank or creditor might want additional security, such as a mortgage over you house and/or some other property or assets. This makes life easier for your creditor because, if you fail to pay on your PG, the creditor can sell the assets without the need to go to court.
However, if the property is your family home then your spouse /co-owner of the property will be required to agree to and enter into the mortgage. In these circumstances your spouse/co-owner will be required to obtain independent legal advice to make sure s/he is not being placed under pressure and fully and clearly understands the effect and consequences of agreeing to and entering into the arrangement.
As a director you will have specific duties as codified under the Companies Act 2006 and at common law. There is a general prohibition of putting yourself in a conflict of interest. For example, notwithstanding that you have given a PG to help the company, you cannot put yourself and your personal interests above that of the company. Where the company is under an obligation to pay many creditors you cannot do anything that will release you from an obligation under your PG by having the company pay the creditor having benefit of your PG in preference to other creditors; this would be unlawful and would be set aside by a court.
There are also procedures that need to be followed in terms of disclosure of your interest and resolutions of shareholders of the Company by reference to the company’s Articles of Association and the Companies Act.
- A PG should only be considered and entered into if there is no other alternative. Once given to a bank or other creditor it is difficult to wean them off the requirement.
- Make sure that the PG is for a fixed amount and not for all liabilities or what is from time to time owed to the creditor, without limit.
- If at all possible, negotiate a release clause in the PG to allow you to terminate it at any time, so that from the point of termination you are not liable for future debts of the company to the creditor.
- Also try to negotiate that the creditor takes action to recover what is owed to it from the company first and only seeks to recover the unrecovered balance from you.
If you and others are shareholders of the company, then it is advisable to have a shareholders’ agreement in place , if only to document the obligation of all shareholders to contribute towards any call or claim made against you under a PG that you have given for the benefit of the company and its business.
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