A personal guarantee is your promise, as an individual, to pay a company’s debt if the company does not. Signing one sets aside limited liability for that debt. The lender no longer depends only on the company. If the company fails, the debt becomes yours, up to whatever limit the guarantee sets.
Lenders, landlords and suppliers ask for guarantees because a limited company can fail and leave them with nothing to pursue. The guarantee gives them a second debtor: you. That is the whole commercial purpose of the document, and it is worth reading it with that purpose in mind.
Where personal guarantees are asked for
A director is most often asked to guarantee:
- business loans and overdrafts
- commercial mortgages
- invoice finance facilities
- asset finance and leasing agreements
- trade credit from suppliers
- leases of business premises
Not every company borrowing carries one. Government-backed bounce back loans, for example, carried no personal guarantee. Check what you actually signed before assuming you are exposed, or assuming you are not.
The terms that decide how much you could lose
Two guarantees with the same heading can carry very different exposure. Check these terms before you sign:
- Limited or unlimited. An unlimited guarantee covers the whole debt, and usually interest and the lender’s costs if the document says so. A limited guarantee is capped at a fixed sum or a percentage.
- Joint and several. If several directors sign on these terms, the lender can claim the whole amount from any one of you. The one who pays then has to recover the others’ share from them.
- Secured or unsecured. Most guarantees are unsecured and name no asset. A secured guarantee is backed by a charge over a named asset, often the family home, and the lender can go straight to it.
- Which debts it covers. Some cover one facility. Others cover all sums the company owes the lender, now and in future.
- When it ends. Ask for a written release when the facility is repaid or refinanced. Do not assume the guarantee ends with the loan.
How to limit your exposure before you sign
The time to negotiate is before you sign, while the company still has something the lender wants. A cap on the amount, a time limit, and a release on refinancing are all worth asking for. Take independent legal advice on the document itself.
AABRS® recommends that directors consider personal guarantee insurance before they sign. Only one company in the UK offers it. It can cover part of what you would owe if the guarantee is called in, and it must be in place before that happens.
How enforceable is a personal guarantee?
Very, if it was properly given. A guarantee must be in writing and signed by the guarantor, or by someone the guarantor authorised to sign. Lenders draft them to survive a challenge.
The case of Gordon Ramsay shows how far that goes. In Ramsay v Love (2015), his signature had been put on the guarantee in a restaurant lease by a signature-writing machine, operated by or under the direction of his father-in-law, who ran his business affairs. Ramsay said he had never signed it. The High Court held him bound, because his father-in-law had authority to commit him to guarantees of that kind.
A guarantee is occasionally unenforceable because it was drafted or signed badly. That is a matter of luck, not a plan to rely on.
If the company fails and the guarantee is called in
Once the lender makes a demand, the debt is yours. If you cannot pay, the lender enforces it like any personal debt: a court judgment, then a charging order over property you own, or a bankruptcy petition if you owe £5,000 or more. The sequence and your options are set out in directors’ personal guarantees during liquidation. In short:
- Settle or negotiate. A lender may accept less than the full amount from a guarantor who can show, with figures, what they can and cannot pay. It has no obligation to.
- Individual voluntary arrangement. A formal deal with your creditors, run by an insolvency practitioner. It needs the support of at least 75% by value of the creditors who vote, and its length is set in the proposal.
- Bankruptcy. Discharge normally comes after one year and releases you from the guarantee debt. It does not release a co-guarantor, and it does not stop a lender enforcing security it holds, such as a charge over your home.
Bankruptcy also has a direct effect on your business life. While you are bankrupt, and while any bankruptcy restrictions order or undertaking is in force, it is an offence to act as a director, or to take part in managing a company, without the court’s permission.