The point of limited liability, and how a guarantee removes it
The reason to trade through a company is that the company's debts are the company's, not yours. A personal guarantee is the lender's answer to that. It puts your own assets behind the company's borrowing, which is precisely what incorporating was meant to avoid.
That is not an argument against signing one. Many businesses cannot borrow without it. It is an argument for knowing exactly what you have signed, because directors routinely discover the detail only when a demand arrives.
How much are you actually guaranteeing?
The first question is whether liability is capped, and the second is what the cap covers.
A guarantee capped at £100,000 sounds contained. If the cap applies to principal only, and interest, default interest, enforcement costs and the lender's legal fees sit on top, the real exposure is materially higher. Ask what the cap includes, not just what the number is.
Then look for the words 'all monies'. An all-monies guarantee is not limited to the facility in front of you: it covers whatever the company owes that lender, now or in future. A guarantee given for a modest overdraft can end up standing behind borrowing agreed years later that you knew nothing about.
Joint and several liability
Where several directors guarantee the same borrowing, the guarantee is usually joint and several. This is widely misunderstood.
It does not mean you are each liable for your share. It means the lender can pursue any one of you for the whole amount, and will generally pursue whoever is easiest to recover from. If you are the director with a house and your co-directors are not, that is you.
You may have a right to recover a contribution from the others afterwards. That right is only worth what they can pay.
Guarantee or indemnity?
Most documents described as guarantees are in fact guarantees and indemnities, and the second word does more work than the first.
A guarantee is secondary: it depends on the borrower's obligation, so if that obligation falls away, the guarantee may fall away with it. An indemnity is a primary obligation that stands on its own. It survives situations that would defeat a guarantee.
Lenders include both precisely so that the indemnity catches what the guarantee misses. It is not something to be indignant about, but it is something to understand before you sign.
The clauses that quietly remove your protections
Guarantors have a number of protections at law. Standard guarantee wording waives most of them, usually in a single dense clause near the end.
Typically you will be agreeing that the lender may vary the facility, grant the borrower extra time, release security or release another guarantor, all without affecting your liability. In other words, the risk you signed up to can change materially without your agreement.
- Whether the lender can increase the facility without your consent
- Whether releasing a co-guarantor leaves you carrying the whole amount
- Whether you must pay before the lender pursues the company or its security
- Whether the lender must tell you when the company falls into difficulty
Getting out of it
The question directors most often ask, usually too late, is how a guarantee ends. The usual answer is that it does not end simply because you do.
Resigning as a director does not release you. Selling your shares does not release you. In most cases the guarantee continues until the borrowing is repaid or the lender agrees in writing to release you — and the lender has no obligation to agree.
Some guarantees allow notice to be given, capping liability at the amount outstanding on the notice date. If yours does, know how that mechanism works before you need it.
Before you sign
Ask the lender for the facility documents as well as the guarantee. The guarantee alone does not tell you what triggers a default, and default is what turns a guarantee from paper into a demand.
If a lender requires you to take independent legal advice, that is not an obstacle to get past quickly. It is the one point in the process where somebody is obliged to act only in your interests. Use it.
This article is general information. It is not advice on your matter, it cannot take account of your circumstances, and the law changes. If you have been asked to sign something, take advice on the document in front of you.