Directors Guarantee: Independent Legal Advice
- 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, directors who have guaranteed the loan can be pursued personally, potentially under joint and several liability.
- Because the director(s) are taking on a personal risk, they must receive mandatory Independent Legal Advice from an impartial solicitor to ensure they understand what, exactly, they are agreeing to.
- Lender terms can vary, and it takes a specialist to translate the fine print and help identify or negotiate more favourable conditions.
Important: Guaranteeing a company loan directly impacts your financial standing. It can affect your borrowing capacity, potentially harm your credit rating, and most critically, if the company defaults, you risk losing your personal assets and facing bankruptcy.
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 the money owed.
What is a Director's Guarantee?
A Directors' Guarantee, or DPG, is a legally binding commitment made by a company director to personally repay a debt if the company defaults. While a limited company typically offers protection for directors' personal assets, this guarantee bypasses that protection, making the director(s) personally liable.
Because of this shift in liability, moving the risk from the company to your personal finances, getting Independent Legal Advice (ILA) is not just recommended, it's mandatory. This ensures you fully understand the terms and the full extent of the personal risk you are undertaking before you sign.
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.
What if I'm a sole trader?
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
Why Independent Legal Advice is non-negotiable for your Director's Guarantee
Lenders insist on ILA because your personal guarantee may not be legally enforceable in court unless there's a solicitor's certificate proving you fully understood the complex agreement. Without this, lenders cannot proceed. More importantly for you, ILA provides:
- Full Clarity on Terms: Our specialist solicitors will translate the legal jargon of your guarantee into clear, coherent language, ensuring you understand every clause and its implications.
- Identification of Unfair Clauses: With extensive experience in these agreements, our panel solicitor can identify any unusual, unreasonable, or disproportionately risky terms that could expose your personal assets beyond what is typical or fair.
- Risk Assessment & Alternatives: Our panel solicitor will provide a candid assessment of your personal risk exposure and advise you against signing any detrimental agreement. Our experts can also discuss whether seeking financing from another lender with more favourable guarantee terms might be a better path for you.
- Peace of Mind: Ultimately, ILA ensures your decision to provide a personal guarantee is fully informed. Our panel solicitor will issue the certificate of legal advice, confirming your understanding and protecting you from unintended long-term liabilities.
Did you know?
Multiple directors can guarantee the mortgage, but each one could be pursued separately for the debt. All parties involved will need to get independent legal advice. We can help with this service for each of the directors.
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What are the risks and benefits of giving a Personal Guarantee?
Directors' personal guarantees are a double-edged sword: they can unlock funding for your business, but they also carry significant personal risks.
We discuss these in more detail in our article on Personal Guarantees by Directors.
✓ | ✖ |
|---|---|
✓ Enabling your company to secure loans, overdrafts, or mortgages that might otherwise be unavailable, especially for newer or smaller enterprises. | ✖ Your personal commitment could range from a fixed sum to covering all possible losses, including future borrowings and lender costs. |
✓ Offering additional security can sometimes lead to more favourable interest rates or loan conditions from lenders. | ✖ Even a single missed payment by the company could trigger the lender to demand the entire outstanding loan amount from you personally, often with little or no notice. |
✓ The business can be seen as strong to other businesses, lenders, and stakeholders if a Director's Guarantee is approved. | ✖ Some guarantees can last indefinitely, potentially binding you even after you leave the company or the primary debt is repaid. |
✓ | ✖ Such a guarantee can affect your credit rating and significantly reduce your capacity to borrow for personal needs (e.g., a mortgage for your home). |
✓ | ✖ In the most severe cases, failure to meet a demand could lead to the loss of personal assets and ultimately, bankruptcy. |
The Independent Legal Advice process for a Director's Guarantee
The lender's requirements and initial information gathering
When your company applies for business finance, such as a commercial mortgage or a substantial loan, the lender will request a personal guarantee. This is particularly common for newer businesses or those without an extensive trading history. You will typically need to provide:
- Your National Insurance (NI) number for a personal credit check.
- Details of your personal income and, potentially, information about your personal assets.
It's important to note that even for smaller credit facilities, like a business credit card, a personal guarantee might be required. If your spouse or partner has involvement or ownership in the business, the lender may also require their personal guarantee, leading to a joint guarantee that necessitates separate ILA for each party.
Receipt of the lender's Guarantee documentation
Once the lender approves the financing in principle, they will issue legal documentation outlining the terms of the personal guarantee. This document will detail:
- The exact amount of money you are personally liable for.
- The duration of the guarantee – how long your personal obligation will last.
- The trigger events that would allow the lender to demand repayment from you.
This documentation is often complex and filled with legal jargon, making it challenging to understand without expert assistance.
Getting mandatory Independent Legal Advice from SAM Conveyancing's panel
Before you can legally sign the guarantee, it is mandatory from the lender that you obtain Independent Legal Advice. This is where SAM Conveyancing provides an efficient and expert service:
- Expert Review: Our specialist solicitors will meticulously review every clause of the lender's personal guarantee document.
- Clear Explanation: We will translate the complex legal terms into plain, understandable language, ensuring you fully grasp your obligations, the extent of your liability, and all potential risks.
- Identifying Risks: We will highlight any particularly onerous or unusual clauses, such as "on demand" repayment triggers or perpetual liability.
- Undue Influence Check: If multiple directors or parties are guaranteeing, lenders require separate advice to ensure no one is signing under undue influence. Our process facilitates this by speaking to each guarantor individually, even if others are present during the main explanation.
- Same-Day Certificate: Upon completion of your advice session and confirmation of your understanding, we issue the necessary certificate of legal advice (often referred to as an Etridge Letter on the same day. This certificate is proof to the lender that you received independent counsel and understood the implications.
This ILA session is your opportunity to ask any questions and ensure you are completely comfortable before proceeding.
Signing the Guarantee and receiving funds
Once the lender has received and is satisfied with your solicitor's certificate of legal advice, you can then sign the personal guarantee document in front of a witness.
With all legal requirements met, the lender will then proceed to release the financing to your company.
What does the Independent Legal Advice (ILA) session cover?
During your ILA session with a SAM Conveyancing panel solicitor, the advice provided is comprehensive and tailored to the unique terms of your specific guarantee agreement. However, there are four main critical areas your solicitor will meticulously review and explain to you:
Distinguishing Guarantee from Indemnity
Your solicitor will clarify whether the document you are signing is purely a guarantee or if it contains elements of an indemnity. An indemnity represents a primary obligation to pay a lender's losses directly, regardless of the borrower's default, and can expose you to significantly broader liability than a standard guarantee.
Security for the Guarantee
A key part of the advice will be to confirm whether your personal guarantee is "secured" by any of your personal assets, such as a charge over your own home.
If your guarantee is secured, it makes it significantly easier for the lender to enforce against you in the event of a default, potentially putting your property directly at risk. Your solicitor will ensure you are fully aware of any such security provisions.
Enforceability of your Personal Guarantee
Your solicitor will advise you on the legal soundness and enforceability of the contract. This means assessing whether, should circumstances turn against you, the lender can legally pursue you personally for the company's debt repayments. They will ensure all legal requirements for enforceability are met, particularly the crucial aspect of you having received Independent Legal Advice.
Limits of your liability
Perhaps most critically, your solicitor will brief you on the full extent of your potential personal liability. This includes explaining the "worst-case scenario" (the maximum amount you could be required to repay), based on the specific wording of your guarantee
While these are the four primary areas, the advice you receive is always specific to the individual circumstances of your case and the precise wording of your personal guarantee agreement. Our goal is to ensure you have complete clarity and confidence before proceeding.
How enforceable is a Director's Personal Guarantee (DPG)?
If you have received Independent Legal Advice (ILA) and agreed to the terms of a DPG, those terms are legally enforceable. While the exact timeline and actions depend on the creditor and the amount owed, a typical enforcement process often follows these stages:
Creditor issues a Statutory Demand
This is often the first formal step. A Statutory Demand is a written claim for a debt against an individual or company. It provides you, or the company, with a strict 21-day period to either settle the debt in full or negotiate a payment agreement.
If the debt (which typically exceeds £5,000 for personal guarantees) remains unpaid after this period, the creditor can initiate formal insolvency proceedings against you personally.
For a company, it's a precursor to a winding-up petition, which can lead to compulsory liquidation and the end of the business. For an individual, it's the first step towards bankruptcy proceedings.
If the debt remains unpaid, you can expect a rigorous investigation into your conduct as a director by the Crown, examining potential wrongful trading, taking credit without reasonable repayment prospects, or failing to submit accounts.
In severe cases, this could lead to criminal proceedings under acts like the Social Security and Administration Act 1992 and the Criminal Justice Act 1988, or a ban from acting as a director for up to 15 years.
Application for a County Court or High Court Judgment (CCJ/HCJ)
If the debt is not settled after a Statutory Demand, or if the creditor opts for a different route, they can apply for a County Court Judgment (CCJ) or High Court Judgment (HCJ) against you. If successful, this judgment grants the creditor various enforcement powers, which may include:
- Warrant of Execution: Allowing bailiffs to seize and sell your personal assets to recover the debt.
- Charging Order: Securing the debt against your personal property, such as your home, making it difficult to sell or remortgage without repaying the debt.
- Attachment of Earnings Order: Directing your employer to deduct payments directly from your salary.
- Third-Party Debt Order: Freezing funds in your bank accounts.
If a personal guarantee is called in, you MUST immediately seek legal advice. While legal action can be lengthy and costly, most creditors are open to negotiating a settlement if it makes commercial sense.
- Arrange a free call today with a member of our ILA team to discuss your needs.
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Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
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.
