What is a director’s guarantee?
A director’s guarantee is best thought of as a personal guarantee from the director signing it. These guarantees are done when a company is contracting with another entity. This could be for matters involving leases, credit contracts, or loans. Let’s assume for the rest of this guide that you signed a director’s guarantee. If the company that you work for cant pay the other party that it contracted with, you have to pay.
If you are interested in reading up more on director’s guarantees click here.
How long can they last?
Director’s guarantees have a lot of freedom in terms of how long the guarantee can last. It could range from a small period that usually covers a singular transaction to a lifelong agreement. Leaving the company does nothing to terminate the director’s guarantee and often the obligation to pay from these guarantees arises long after the director has left the company. Because the director’s guarantee is one of personal liability, even if the company winds up and deregisters, the obligation still remains. Even though companies are separate legal entities, the director’s guarantee is personal and the director becomes party to the contract. This means that even if you left the company you work for, depending on your guarantee you are still liable for the debt.
Click here to read up on several factors you should consider when choosing to sign a director’s guarantee.
How do I get out of it?
Unfortunately there is no easy way to get out of a director’s guarantee. The best chance you have would be to contact the creditors (the party that you offered your guarantee to) and request that they release you from the guarantee. Although you have no bargaining power with this method they may release you if the company is performing well. Along with this, you could if you were resigning, ask the creditors to transfer your guarantee to the new director. This would require the consent of all parties, including yourself, the creditor(s), and the new director. If all are willing then you will be free from the director’s guarantee.
Another way that you could terminate the director’s guarantee is if you prove that there was a circumstance that makes the guarantee void. These circumstances include but are not limited to:
- misrepresentation
- duress
- unconscionable conduct
If you wish to have your director’s guarantee set aside, it is best practice to contact a lawyer to see if there are any of these elements present or to best negotiate with creditors to release you from the obligation. Feel free to reach out to our network of expert lawyers that specialise in the area.
What if I cant pay the debt?
If you cant pay the debt the creditor is most likely going to obtain a judgment against you. Meaning that they are going to go to court over the matter and get a court order requiring you to pay. This judgment may grant them the power to place a garnishee on your pay, a property warrant, or force you to file for bankruptcy. A garnishee is like a cap on your wages, so instead of getting the full amount that you would from your employer you would receive a smaller amount and the rest would go to the creditors.
Interested in company structure? Find out the difference between companies limited by shares vs guarantee in this article.
What do I do after the creditors exercise the guarantee?
Once you become aware that the creditors are exercising their right to your guarantee you should first contact other directors who may also be liable for the same debt. This is advantageous because you could come to an agreement to split the debt and lighten the load for everyone. You should also contact the creditors and let them know your financial position and whether you have the means to pay. The creditors usually will work with you to come to an agreement that is sustainable for you. At the end of the day they want their money and there would be no reason for them to drown you in unrepayable quantities of debt.
It is also important to understand joint and several liability to assess your level of risk. If directors of a company have signed joint and several liability guarantees, that means that the creditors have the choice of which directors to pursue. The creditors can go for any number of directors. The common practice is to go for the director with the deepest pockets. It is advantageous to assess the financial health of the other directors to determine how risky your situation is.
Conclusion
In short, if you signed a director’s guarantee it is difficult to get out of. That doesn’t mean it is impossible but it boils down to the creditors decision. You may be able to void the guarantee if there are circumstances that make it unconscionable. A key takeaway from this guide is that director’s guarantee’s can be for life and are very serious in nature. If you already signed a director’s guarantee or have been approached to do so, you should consult a lawyer to determine whether it is the best choice for you and your options to terminate. Feel free to connect to our network of expert lawyers and get your free quote today.
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