When becoming a company director, it is easy to believe that a limited company offers full protection to the directors against personal liability. Whilst this is a good starting point, there are several situations in which a director may be personally liable for the company’s debts, one of the most obvious of these being a directors personal guarantee.
What is a directors personal guarantee?
As a company is a separate legal entity, third parties such as banks or suppliers entering into arrangements with a company may seek a directors personal guarantee to meet the debts of the company if the company fails. This type of directors personal guarantee is particularly relevant when the company is new or when it is raising new finance such as an overdraft facility.
What are the pitfalls with directors’ personal guarantees?
Any director being asked to give a personal guarantee should ensure that they get independent legal advice from a regulated law firm such as https://www.parachutelaw.co.uk/director-guarantee. It may be the case that the third party requesting the directors personal guarantee will require a certificate from a solicitor confirming that the director fully understands what the directors personal guarantee means and when it may be called in.
Where there are directors personal guarantees, it is vital that any company experiencing financial difficulties should get advice immediately to prevent the directors from being in danger of having the personal guarantee called in. Advice from a reputable source is critical, as is early dialogue with any creditors. Failure to do so could result in a directors personal guarantee being called in and the directors then being liable for the company’s debts.
Directors can also be personally liable if they act fraudulently or are acting beyond their authority even if no personal guarantee is given.
