Company directors are considered to be separate legal entities from their businesses and this provides valuable protection against fluctuating market conditions which threaten the viability of the business. In many instances, such fluctuations require directors to seek additional funds and where the lender believes there to be unacceptable risk, they may require a director guarantee.
What is a director guarantee?
A director guarantee removes the protection afforded to a business’s director(s) by making them personally liable for repaying the debt in the event that the business becomes insolvent.
Because a director guarantee transfers significant financial risk to the director, they are required to seek advice from a legal firm such as Parachute Law prior to signing the director guarantee. This is to ensure that they understand the risks that they are accepting and have been afforded the opportunity to extricate themselves from the agreement before it becomes legally binding.
What other options exist?
If a director deems the risk of signing a director guarantee to be too great, they should consider alternative methods of funding their business plans. They should investigate alternative funding sources, such as investor financing or asset finance which may represent a lower risk.
If they decide to pursue mainstream business loan applications, they should be prepared to negotiate the terms of the agreement in an attempt to minimise their financial liability. They should be conscious that accepting joint and several liability may ultimately render them responsible for not only the business’s shortcomings but also those of other signatories. They should also argue for exit clauses to sever their responsibility in the event that they leave the business.
The final way to minimise personal liability is to take out a personal guarantee insurance policy which will cap their personal liability in the event that the business enters insolvency and cannot repay its debts.
The importance of legal advice
Directors considering signing a director guarantee are legally required to seek legal advice. They should use this opportunity to their advantage, gaining a deeper understanding of the risks and considering alternative solutions.
