Director Guarantee

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What is a Director Guarantee?

A Director’s Personal Guarantee assures a lender that you will be personally liable for the mortgage if the company is unable to do repay. Such a guarantee may be required in a number of situations.

Start-up companies and small limited companies, in particular, can unlock new avenues for borrowing and mortgage with the help of a Personal Guarantee. However, you will be required to take Independent Legal Advice (ILA) in most cases before you can sign the guarantee.

ILA also helps you fully understand the risks associated with offering your Director’s Guarantee. Our Director Guarantee solicitors can work with you to identify these risks and ensure that you do not open yourself to unnecessary liabilities.

Our commercial property solicitors can also help you negotiate the best terms when offering a guarantee for a commercial property.

When is a Director Guarantee Required?

A Director’s Guarantee may be required in any situation where the company is making a financial commitment or otherwise borrowing money. Such situations may include the following:

  • The company is entering into a mortgage.
  • The company has applied for a new credit card.
  • The company is trying to finalise a lease agreement to purchase new equipment or buy a new vehicle.
  • The company wants to borrow a business or startup loan.
  • The company is trying to enter into any other type of commercial contract that requires the personal guarantee of an individual.

In these situations, you may need to offer Director’s Guarantee on behalf of the company. Companies that have a long history of success or are otherwise known as well-established entities in their respective domains can typically conclude commercial transactions without the need of a guarantee.

New companies, small limited companies, and startups, on the other hand, are seen as credit risk for lenders and others doing business with the company. This creates the need for a personal guarantee.

The personal guarantee assures the other party in a commercial or financial contract that the guarantor will pay them in case the company is unable to do so.

You can consult our commercial conveyancing solicitors to determine whether or not you should provide Director’s Guarantee for a particular financial transaction or contract.

Our Independent Legal Advice solicitors can help you provide the guarantee at the earliest in case you do require it. You can also determine if you can use other options to secure a new property with the help of our commercial property solicitors.

Benefits of a Director’s Guarantee

There are numerous benefits of director’s personal guarantees. These benefits typically apply to small companies or new startups. They include the following:

  • A new and relatively unknown company lacks credit-worthiness in the eyes of suppliers, property owners, and lenders. A personal guarantee adds to the credit-worthiness and enables the company to conclude its transactions and contracts.
  • A director’s guarantee allows the company to take startup or business loans which may serve as the springboard for company launch and growth.

In many situations, the personal guarantee of a director is the only way a new company may be able to secure funding, supplies, or office premises. This makes it an immensely useful and valuable tool for new or small limited companies.

However, it is important to consult experienced Director Guarantee solicitors before you offer a guarantee. You will be required by most lenders to seek ILA from reputable Independent Legal Advice solicitors before you confirm your personal guarantee.

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Disadvantages of a Director’s Guarantee

Although there are several benefits of a director’s personal guarantee for a new company, the guarantee comes with many downsides as well. Here is a look at these:

  • A higher personal risk. As the personal guarantor for a company loan or mortgage, you are opening yourself up to a greater personal risk. This is because your personal assets are on the line in case the company defaults or is otherwise unable to repay.
  • A greater chance of personal bankruptcy. The guarantee you give as the director of the company for the company’s financial transactions or contracts can backfire. If the company has to liquidate with no means to pay the lenders or mortgage companies, your own assets may be called in. These can involve your personal home and other properties as well as other forms of assets.

Due to these obvious downsides and risks, it is critically important that you seek independent legal advice from reputable Director Guarantee solicitors before you proceed with this option. The independent legal advice solicitors will advise you on whether or not providing the guarantee is the right decision for you and your company.

You can consult our commercial property solicitors to seek specific ILA regarding property purchases and rentals for your company. With the help of our commercial conveyancing solicitors, you can rest assured that you have negotiated fair terms and conditions for your personal guarantee.

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Impact on Your Duties as a Director

Once you lend your personal guarantee for a transaction or contract concluded by the company, your duties as a director may become slightly limited. Specifically, you may find that you are no longer allowed to vote where a conflict of interest may arise as a result of your guarantee.

For instance, you may want to pay a creditor who has received a personal guarantee from you, before paying other creditors of the company. This is an example of conflict of interest. The other stakeholders of the company, and even the articles of association, may bar this.

It is best to understand this impact on your directorial duties before you offer your director’s guarantee. The Director Guarantee solicitors at our law firm can apprise you on precisely how your guarantee can limit your role in company affairs. Our independent legal advice solicitors offer detailed guidance in this regard.

Get in touch with our expert Director Guarantee Solicitors today.

Why is Independent Legal Advice Required?

Many lenders and creditors require you to get ILA before you can sign your personal guarantee. This is for a number of reasons. The ILA primarily serves as a legally binding tool so that the creditor or lender can enforce the terms of the guarantee if needed.

It also acts as a genuine apprising mechanism so that you become well aware of your commitments as per your director’s guarantee. In many cases, a personal guarantee is enforceable only if the guarantor has received ILA prior to signing the guarantee.

You will need also legal help and assistance in case you are asked to pay back the monies owed to the company under your guarantee. If this is in connection with a property purchase, rental, or transfer, you should consult reputable commercial conveyancing solicitors as soon as possible.

Our commercial property solicitors can help you determine how you may be able to shield yourself from the liabilities arising out of your personal guarantee.

What if I Resign as a Company Director?

Even if you resign from your position a director of the company, your personal guarantee remains valid. This is why it is typically not a good idea to leave your position as this makes you no longer able to influence company decisions.

If you resign and the company is eventually unable to repay the debt or fulfil a contract made under your personal guarantee, you will be liable for it. The creditor or lender may even threaten you with court action in case you don’t immediately repay the amount.

In many cases, the lending companies don’t even wait for the administration or liquidation procedures to begin before they call in your director’s guarantee. You may be asked to settle the outstanding balance in full and immediately.

When this is the case, it is highly recommended that you consult commercial conveyancing solicitors right away. Our commercial property solicitors can advise you on how best to get out of such a situation without risking your personal assets and wealth.