Understanding Director Personal Guarantees

A director guarantee (also called a personal guarantee) is a legally binding promise that you, as a director, will personally repay the business debt if the company cannot. This effectively removes the limited liability protection that company structures normally provide. Lenders require guarantees because companies can be wound up leaving debts unpaid, while personal guarantees give lenders recourse to your personal assets.

Limited guarantees cap your liability at a specific amount, limiting exposure. Unlimited guarantees make you liable for the full debt amount regardless of your shareholding. Joint and several guarantees mean each guarantor is liable for the entire debt, not just their proportional share. Continuing guarantees apply to ongoing facilities and future advances, not just the initial loan. Specific guarantees apply only to a particular transaction or debt.

When you sign a personal guarantee, your personal assets become available to the lender if the business defaults. This includes your family home (even if jointly owned), investment properties, vehicles, savings, and other personal assets. Some assets may be protected by state laws (such as certain tools of trade), but the exposure is generally comprehensive. Spouses may also be affected if assets are jointly owned.

Personal guarantees affect your personal credit profile. The guaranteed debt may appear on your credit report and affects your borrowing capacity for personal loans and mortgages. If the business defaults and you cannot honour the guarantee, this will significantly damage your personal credit history. Lenders will assess your total contingent liabilities when considering new applications.

You may be able to negotiate guarantee terms. Request a limited guarantee capped at a percentage of the facility. Propose a reducing guarantee that decreases as debt is repaid. Ask for release conditions when certain milestones are met (such as debt-to-equity ratios). Ensure guarantees contain sunset clauses or expiry dates. Stronger businesses with good track records have more negotiating power.

Guarantees typically remain in place until the debt is fully repaid or the lender agrees to release you. If you resign as a director, the guarantee usually continues unless specifically released. When refinancing, ensure new lenders release old guarantees. Obtain written confirmation of guarantee discharge when loans are repaid. Former directors can remain liable years after leaving the company.

Consider asset protection strategies before signing guarantees (not after, as this may constitute fraud). Discuss with your lawyer and accountant about family trusts, asset structures, and insurance options. Ensure you fully understand guarantee terms before signing. Take independent legal advice, particularly for significant facilities. Maintain accurate records of company finances to identify issues early.