Back
We continue to provide our legal services through the COVID-19 lockdown. Please visit our COVID-19 Hub for legal insights, or contact us directly.
Get in Touch Menu

Personal guarantees... a risky business

23 March 2009

In times of economic uncertainty, company directors should be aware of the dangers of giving personal guarantees.

If a director acts as a guarantor for any type of commercial loan or lease agreement on behalf of his company, he can remain liable for repayment for a potentially unlimited period – even if his association with the business comes to an end. Also, personal guarantees are often secured by way of a charge on the family home – so if they ever have to be enforced, the implications can be extremely serious.

A guarantee is generally a contract whereby the director promises to fulfil his company’s obligations to the bank if the business fails to perform. Where a director has contracted on the bank’s own standard form of guarantee, any ambiguities in the drafting will be construed against the bank. This has spurred banks to make their terms as far-reaching as possible so as to maximise their chances of enforceability and guarantee documents are now often long and complex.

Under the guarantee a director’s liability begins if the company defaults on the loan. Sometimes there is a stipulation that the bank must formally demand payment from the director before they can sue him on the guarantee. Many guarantees have a ‘continuing’ nature, meaning that the director continues to be liable until he is released.

Even if at some point the company owes nothing to the bank, the director remains on the hook in respect of any future liabilities that arise, for instance if the company borrows more money (a decision the director may not know about). The guarantee also continues regardless of how circumstances change. For example the director would still be liable if he became ill, was made bankrupt or even if he died (in which case, liability would pass to his estate).

It is sensible to seek professional advice before entering into a personal guarantee and, indeed, most banks will insist on it nowadays. Directors need to understand precisely what their rights are, as well as the rights the bank has reserved for itself, including procedures to discharge the guarantee. We are happy to advise and negotiate variations of the terms if appropriate.

As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.

Contact us

Contact
Sophie Martyn BSc (Hons)
Associate, solicitor
View profile
Sophie Martyn
Related services
Share this article
Resources to help

Related articles

Corporate & commercial issues: COVID-19 FAQ

Corporate

The global outbreak of coronavirus (COVID-19) and the government’s resulting emergency measures have had severe implications for many businesses. Read on for answers to some frequently-asked questions on corporate &…

Sophie Martyn BSc (Hons)
Associate, solicitor

Fixed price legal advice for SMEs & the Coronavirus Business Interruption Loan Scheme

Corporate

The Coronavirus Business Interruption Loan Scheme (CBILS) has thrown a much-needed lifeline to businesses experiencing cashflow difficulties as a result of the coronavirus outbreak. The eligibility criteria of CBILS was…

Chris Wills LLB (Hons)
Partner

Commercial contracts & coronavirus: What are the implications?

Commercial

As the coronavirus (COVID-19) pandemic develops, we have seen significant disruption to businesses across multiple sectors in the UK. Understandably, this has led to widespread concern about the implications for…

Sophie Martyn BSc (Hons)
Associate, solicitor
Contact us