The director’s guarantee: what you need to know before signing it

Depending on the circumstances, a director’s guarantee can be a route to unlocking essential finance or cause an array of problems with serious consequences. The key to avoiding potential pitfalls is to obtain proper financial and legal advice before signing and signing this type of document, however, let’s begin here by running through the basics.

What exactly is a directors guarantee?

A director’s guarantee is typically required to successfully complete transactions between businesses. Directors of Limited companies all share limited liability, which means that they would not be personally liable if the business were to fall into administration or liquidation. However, directors can choose to sign a director’s guarantee, which states that in the event their company experiences financial difficulties, they will use their own personal financial resources to cover the debts.

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There are a range of advantages that come from having a director’s guarantee in place. In fact, many businesses will only engage with companies that can provide this type of guarantee, particularly when high-value transactions are taking place. A director’s guarantee also doesn’t have much of an impact on the director themselves unless, of course, the business builds huge debts that can’t be repaid.

Can a director’s guarantee protect my business?

While there is always the potential for guarantees to turn into nightmare situations for those who will be responsible for repaying debts, they can provide lenders with an additional layer of protection when entering into high-value business-to-business transactions or agreements with a new client.

When drafting this type of document, seeking legal advice will ensure that your business will be fully protected should your business deal go awry.

What are the legalities of a director’s guarantee?

Provided that the guarantee has been drafted in accordance with legal guidelines, a company can very easily enforce it as a way to recoup the money they are owed. To ensure that you are properly protected, your directors guarantee should be prepared by an experienced legal firm, such as Sam Conveyancing.

If a company discovers that the money isn’t going to come from the business itself, this document makes it extremely easy for them to target the director via the County Court system. County Courts handle all non-criminal civil cases and their judgements can be enforced via a range of different procedures, including instructing bailiffs to take control of goods. Successful claims can leave directors in difficult financial positions and may even result in their possessions and/or properties being seized to repay business debts.

What do I need to do before signing a director’s guarantee?

It is imperative to obtain comprehensive legal advice before signing a director’s guarantee. Wording can vary significantly between guarantees and you need to know exactly what you are agreeing to before signing on the dotted line.

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What do I need to know if I have already signed a director’s guarantee?

If you have signed a director’s guarantee and either your business is showing signs of financial difficulties or your personal financial circumstances have changed, it is important to obtain both financial and legal advice as quickly as possible.

Similarly, if your business has entered liquidation or administration and you receive a payment request from another company, seek legal advice as soon as possible to ensure that you understand what your options are.

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