While company directors may face claims from several sources (e.g. legislative breaches), the most common claims are from those whom they have offered personal guarantees in connection with the company’s activities.
A company director that signs a guarantee to support or guarantee the obligations of a company means that the director will be personally liable for the company’s debt, obligations and commitments if that company is unable to meet its obligations.
Personal guarantees are given by directors of companies quite routinely, especially for small to medium size businesses that manufacture or supply products. If you lease business premises, personal guarantees are often a mandatory requirement from the landlord. If the business has ongoing accounts with their suppliers to provide materials on credit for the business, the directors of the companies are often required to provide personal guarantees to their suppliers. In most instances, these businesses will not be able to trade smoothly without having the personal guarantees in place.
When a director resigns, perhaps in the situation where that director sells their share in the business or if the company is put into liquidation, whether voluntarily or involuntarily, their personal liability does not automatically cease. This issue can sometimes be overlooked and the directors in question may not know that they are still “on the hook” until (for example) they are called upon to honour a payment. In most cases, unless it is specifically provided, the creditor does not have to pursue the company first.
Tips on managing risk
Given that the provision of personal guarantee may be unavoidable, here are some tips to minimise exposure on the part of the director (remember these tips are not exhaustive and should not constitute legal advice);
- Limit the dollars figure of the personal guarantee.
- Limit the duration of the personal guarantee.
- Negotiate the terms: Often directors are asked to sign a guarantee as “standard practice”. Don’t take the requirement at face value as certain terms may be negotiable, for example, if there are a number of suppliers you can do business with, you may be able to shop around and negotiate for the supplier to forgo the guarantee if the debt/exposure is kept within a certain level.
- Records: Keep a record of all guarantees provided relating to the business.
- Follow up your release: Once the debt is repaid, or if you are selling your business or shares in the business, then you need to ensure that your guarantee is released. You are not automatically released from your guarantee if you cease being a director of a company.
- Seek professional advice: If you are unclear about the potential liability or the terms of the guarantee then it is best to seek professional advice.
Copyright © Cavell Leitch. All rights reserved. Redistribution is only permitted with express written permission. For enquiries please contact us. This article by its nature cannot be comprehensive and cannot be relied on by clients as advice. It is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Cavell Leitch for advice specific to your situation.