What is a Director’s Personal Guarantee?

You may have heard of the saying “piercing the corporate veil” - which means that in the event of insolvency, a company’s directors become personally liable for any debts or unfulfilled payments if they have signed a Director’s Personal Guarantee.

The guarantee is a way for banks, lenders, or suppliers to protect their financial interests when a company enters insolvency.

You may be asked to sign a Personal Guarantee when you’re looking to secure a business loan, enter into a lease agreement, or make different types of financial arrangement for your company. So what should you do when this happens?

What to do if you’re being asked to sign a Personal Guarantee

The first and most important thing you can do is to seek legal advice to help you break down the terms of the guarantee and make sure you fully understand them before signing on the dotted line.

Some examples of these terms include definition of payments and joint responsibility where more than one director is involved. You can take a look at five common terms here.

The guarantee, when it comes into effect, essentially removes your protection from limited liability and has a direct – and potentially significant – impact on your personal finances. So make sure you consult a lawyer before you sign the guarantee. If you already have a Director’s Personal Guarantee and it’s being called in, what should you do next?

What happens when a Personal Guarantee is called in

The first thing that will usually happen is that your lender will send you a letter that states the payment terms – i.e. the amount and timeframe. This is called a Statutory Demand and you usually have 21 days to settle the payment.

However, if you are unable to meet the payment terms, your lender will either proceed to present a bankruptcy petition to the court or take legal actions against you, such as applying for a High Court Judgement to take over ownership of your goods and assets.

Should I consider taking out a Director’s Personal Guarantee Insurance?

Insurance can provide a level of protection for your personal assets and properties in the event of insolvency if you have signed a Personal Guarantee.

Find out how this specialist insurance works and what it can cover.

Here are a few helpful links if you want to find out more about this topic:

What is a Personal Guarantee?

Personal Guarantees by Directors: the Implications for Insolvency

Directors Personal Guarantee - What Happens In Insolvency or Liquidation?