Directors Guarantee
- When a company applies for a mortgage or large loan, the lender often requires a guarantee from one or more directors.
- If the company defaults on repayments, the lender can pursue any of the company's directors who have personally guaranteed the loan for full repayment under the principle of joint and several liability.
- Because the director(s) are taking on a personal risk that they do not personally benefit from, they must receive legal advice from a solicitor who is independent of the transaction to ensure they understand what, exactly, they are agreeing to.
- Lender terms vary, and it takes a specialist to translate the fine print into layman's terms. Your independent legal advisor will tell you if the terms are not favourable and explain alternative options.
As a 'limited' company, there is limited liability for all directors. This protects you, personally, from liability for the company's debts if it were to go into liquidation or administration and fail to pay what it owes. For this reason, companies will not grant a mortgage to a company without a director's guarantee; the company could be dissolved, and there would be no one to pursue for the money owed.
What is a director's guarantee?
A legally binding promise from the director that they will repay the debt's of the business if the business fails to.
With a director's guarantee, the lender can come after you personally in the county courts. If their claim is successful, you could lose your own home to repay the debt.
Each director's guarantee varies in terms and risk. They are commonly used without resulting in disaster, but it is essential to get reliable independent legal advice to fully understand the terms of your guarantee and query any terms which are unfair or unreasonable.
Personal guarantees are used in credit deals to provide funding for businesses. Small business founders often use a personal guarantee because they have a vested interest in their company's launch and subsequent business development, having already made a substantial personal investment in their company.
A personal guarantee can secure additional capital. The company then has to pay creditors monthly instalments rather than generating capital for equity investors. As long as the business pays, the guarantors are unaffected.
You don't need a personal guarantee as a sole trader or a partnership, except for Limited Liability Partnerships (LLPs) because any debt of the company is already deemed as a personal liability of the business owner/s.
What are the risks and benefits of giving a Personal Guarantee?
We discuss the risks in further detail in our next article on the risks of personal guarantees by directors.
What are the advantages of directors guarantee? | What is the disadvantage of personal guarantee? |
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What are the advantages of directors guarantee?
| What is the disadvantage of a personal guarantee?
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Why do I need legal advice on a director guarantee?
Because of the wide range from reasonable to severe risks, you need to check out the details of the specific guarantee your lender is asking for. An independent solicitor who specialises in this type of legal advice is well-experienced in reviewing these agreements and catching anything which is unusual, unreasonable or unfair. They will make sure you fully understand the risks and advise you against signing a bad agreement.
You may be better off obtaining a mortgage from another lender who uses a more favourable director guarantee.
Your guarantee is not enforceable in court unless there is a certificate of proof that you understood the complex agreement. Lenders cannot accept guarantees made without proof of ILA.
Multiple directors can guarantee the mortgage, but each one could be pursued separately for the debt. All parties involved will need to get personal guarantee independent legal advice. We can help with this service for each of the directors.
Please fill in the form below for one director only. £299 INC VAT | Please fill in the form below if you are the first of multiple directors. £299 INC VAT + | Please fill in the form below if you are an additional director. £180 INC VAT |
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What's the process for providing a director's guarantee to secure credit?
When you apply, you will have to provide credit information for your business. If your business is small, new, or you are applying for a large loan, such as a mortgage on a property, your lender may request a director guarantee.
Each of the directors who are guaranteeing the loan has to provide their National Insurance (NI) number for a hard credit enquiry and information on their personal income and, possibly, detailed information about personal assets. You might be expected to give a personal guarantee even if you're just applying for a business credit card, especially if your business is new and has little or no credit history of its own.
If your spouse or partner owns or controls a significant fraction of your business, they might be expected to provide a personal guarantee as well - you would then both be credit checked, and both sign a joint personal guarantee.
If your lender decides that it is happy to underwrite the financing, it will issue legal documentation outlining the terms of the guarantee including:
- The maximum amount of money you will be personally liable for
- The duration of the guarantee
- The trigger for calling upon the guarantee
You will need legal advice on the terms from an independent solicitor before you can consent to the guarantee.
Questions you should ask yourself regarding the lender's contract
Once the solicitor has explained the terms, you need to really consider whether you're comfortable with the contract; ask yourself:
- How does your contract suggest creditors will enforce the guarantee?
- Will they serve notice, or can they seek payment on demand?
- What exactly will constitute a default?
- Do terms allow for any remedy period?
- How are your net assets assessed, and is this likely to change after you've given your guarantee?
- Does your contract provide that creditors exhaust every other avenue before making demands on you?
- How will you manage personally in a worst-case scenario?
Always remember that in law, if you personally guarantee a debtor (your company), even if the debtor declares bankruptcy and is discharged from responsibility for a debt, you, as a guarantor, still remain liable for it.
The lender will request that you take separate legal advice to ensure the different guarantors are not under 'undue influence' from one another. We provide legal advice to all of the directors in one meeting, as the terms are the same. The other directors are then asked to leave the room so that each guarantor can confirm separately that they are happy to proceed without the influence of anyone else.
The certificate of legal advice proving that you understand the terms is known as an Etridge Letter; it is a document from your solicitor summarising the advice given regarding the implications of the contract, as stated, and signed by the solicitor.
After the lender has received and is satisfied with your Etridge letter, you can sign the guarantee document in front of a witness, and then the lender can provide the finance.
What does the advice cover?
There are four main points on which your solicitor will advise.
The Personal Guarantee Should Not Be an Indemnity
The personal guarantee should not be an indemnity – which is in itself a primary obligation to pay further damages to reflect a lender’s loss – and it's not contingent on the obligations of the borrower. Your solicitor, when examining the details of a contract which claims to be a guarantee, will look to be clear with you concerning whether you'll be acting as an indemnifier, a guarantor, or a mixture of the two.Is your Personal Guarantee to be supported by a security or not?
Your solicitor will brief you as to whether or not your guarantee is to be supported by a security, which might be a charge over your own home. Any security you put up makes it easier for your lender to enforce against you in the event of a default.Is your Personal Guarantee enforceable?
Simply put, your solicitor should advise you as to whether your contract is legally sound and whether, if circumstances move against you, the lender can pursue you personally for default on your company's debt repayments.What are the limits, if any, of your liability?
Your solicitor should brief you as to your full, worst-case liability in the event of the lender calling on your personal guarantee.
On the strength of this advice, you might even wish to consider negotiating with your lender regarding capping your liabilities; if you are successful in bargaining, this would involve redrafting the contract. This strategy is highly likely to involve further legal costs, however, and further advice. You should seek appropriate advice before attempting this.
The above list is by no means a complete or definitive list of all the possible subjects which you might be advised about by your solicitor; the actual advice you receive depends on the individual circumstances of your case.
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How enforceable are director's guarantees?
If you have agreed to the terms and received adequate legal advice the terms are enforceable. What happens next depends on the creditor and how much is being called upon. A typical timeline is as follows:
Creditor issues a Statutory Demand
This gives you 21 days to either settle the debt or reach an agreement to pay. If this is not possible, the creditor can start bankruptcy proceedings (providing that the debt exceeds £5000 (this is usually the case with personal guarantees).
What is a Statutory Demand?
A statutory demand is a written claim for a debt against a company or individual from one or more of its creditors. It's a method used to recover a serious debt, and is usually the first step before issuing a winding up petition (for a company), or bankruptcy (for an individual).
If the debt remains unpaid at this stage, it might result in compulsory liquidation, which normally spells the end of your company. Additionally, you can expect to be investigated personally by the Crown, which will examine if you traded wrongfully, took out credit without reasonable prospect of repaying the debts, failed to submit accounts or committed a number of other offences.
In the worst-case scenario, you might face criminal proceedings under the Social Security and Administration Act 1992 and the Criminal Justice Act 1988. HMRC is entitled to recover unpaid Pay As You Earn (Income) Tax from directors if there's proof that you willfully failed to operate the scheme. You can also be banned as a director for up to 15 years.
The creditor can apply for a County Court/High Court Judgement
The usual results will be that they then either get a Warrant of Execution and get the bailiffs in, or they go for a Charging Order to secure the debt against your home.
If you're a director and are looking to provide a personal guarantee for your company taking up a mortgage to buy property, our solicitors are fully qualified to provide Independent Legal Advice.
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Our solicitor will fully explain the implications of entering into the mortgage agreement and the risks you need to be aware of. We have appointments from 22/11/2024*, and your certificate of legal advice is issued the same day
Please fill in the form below for one director only. £299 INC VAT | Please fill in the form below if you are the first of multiple directors. £299 INC VAT + | Please fill in the form below if you are an additional director. £180 INC VAT |
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
