Simply put, it’s a personal assurance by the company’s director against its debts.
What does it mean?
When signing a director’s guarantee, you agree to be personally liable for all the company’s financial obligations. As a company’s director, you might often be requested to provide a guarantee in support of your company’s obligations in various contexts, such as property leases, sale of goods contract, or simply a bank loan.
Providing a director’s guarantee can bolster your company’s credit rating and provide assurance to the company’s debtors. However, it also allows them to breach the ‘corporate veil’ and take your personal property to cover the company’s debts. As a director, therefore, it is important that you carefully consider what obligations you are exposing yourself to. You should also be clear about your duties as a director.
Types of guarantees
Joint or several guarantee
If your company has multiple directors, you might have to sign a ‘joint and several’ liability. This is a very serious undertaking, as signing the guarantee will likely allow the lender to pursue:
- all of the directors,
- some of the directors, or
- specifically a single director,
for the full amount of the debt owed.
Therefore, when signing a guarantee, you should either ask for a several liability, for a limited proportion of the principal debt obligation, or consult one of LawPath’s Capital Raising lawyers.
All moneys guarantee
An ‘all moneys/all accounts’ guarantee makes the director liable for all the debts and financial obligations of the company, present and future, regardless of how they arise. This is again an extremely risky guarantee. The final amount that the company owes may end up being a lot higher than what you signed up for. It is therefore crucial to limit the proportion or amount that your guarantee covers. You should be clear about all the relationship and financial obligations of the company, and wary of situations that your company might face when it hits rocky times.
Should you give a guarantee?
You might be able to find lenders for your business who offer credit without a guarantee. As with all things in finance, however, you might have to pay an additional cost as the creditor would want to be compensated for the additional risk that they are taking on. If you cannot afford to pay the additional cost, giving a director’s guarantee might be unavoidable for your business. If you have no choice but to give the sign the guarantee, make sure you consult with a capital raising lawyer and are completely confident about situations that make you liable for the company’s debts.
Need to find a capital raising lawyer? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents, obtaining a fixed-fee quote from our lawyer marketplace or any other legal needs.