What Is a Director’s Guarantee? (2020 Update)
A director's guarantee is an undertaking which allows lenders to recover unpaid company debts from directors personally. Find out the risks involved here.
If you’re the director of a company and need to take out a loan, sometimes you’ll be asked to sign a director’s guarantee. A director’s guarantee places liability into the hands of the director, rather than the company. This means that if your business cannot repay its loans, you’ll have to pay it back. This type of undertaking can have serious consequences, so it’s important tat you understand what’s involved before signing anything.
What does it mean?
When signing a director’s guarantee, you agree to be personally liable for your company’s debts. 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. If you do not have the money to repay the loan, this may result in you having to file for bankruptcy. As a director, therefore, it is important that you carefully consider what you are exposing yourself to. You should also be clear about your duties as a director, and understand that trading whilst insolvent is against the law.
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 our 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. This is because your creditor may 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 lawyer first and are completely confident about what situations will make you liable for your business debts.
Avi is a legal intern at Lawpath. He is currently studying a Bachelor of Commerce (Finance) with a Bachelor of Laws at Macquarie University.