As a director of a company, you may be asked to sign a director’s guarantee when the company is entering an agreement. But what exactly is a director’s guarantee and what obligations do you have when you sign one? This article will explain the dangers that you need to be aware of before signing a director’s guarantee.
What is a Director’s Guarantee?
A director’s guarantee is a personal guarantee, often signed by directors when a company is entering an agreement, such as a finance loan, lease or credit contract. They are more common in situations where the company may have limited assets. Therefore, the lender or other party wants extra protection to ensure that your company will pay any debts. Signing a director’s guarantee is a serious undertaking. It means you are liable for any debts under the agreement that the company can’t pay.
Dangers When Signing a Director’s Guarantee
Before signing a director’s guarantee, it’s essential you are fully aware of all your obligations under the guarantee. There are some hidden dangers that director’s guarantees can hold.
1. You Are Liable If the Company Can’t Pay
Signing a director’s guarantee means you agree to be liable for the company’s debts under an agreement if the company can’t pay. This includes situations where the company stops trading in circumstances over which you have no control. It is a binding commitment. Some director’s guarantees include an ‘all moneys’ guarantee. This extends your liability to debts the company owes beyond a particular transaction or agreement.
2. Your Personal Assets May Be at Risk
If your company can’t pay its debts, the creditor or other party to the agreement can take you to court as a director, under the director’s guarantee. If you don’t or can’t pay, the court may make a judgment that you are in the wrong. This will affect your credit rating. The creditor can also take steps to enforce the judgment, such as a warrant to seize property or bankruptcy, which could place your personal assets at risk.
3. Your Liability May Be Joint and Several
If a company has more than one director, it’s common for all directors to be asked to sign a director’s guarantee. In these cases, the liability is shared between the directors (also called guarantors) and is called ‘joint and several liability’. This means the liability remains until the debt is paid in full, regardless of whether it’s paid by one or more of the directors. If the debt is paid by one director, the directors can then be liable to each other to sort out equal payment. It also means the creditor can choose to sue all of the directors for the debt, or just one. In a worst case scenario, if the other directors can’t afford to pay, you may be stuck with the full debt.
4. There May Be Extra Costs and Charges
Director’s guarantees can vary in detail and complexity. The guarantee may include extra costs and charges that you may not be fully aware of when signing. These costs may include onerous interest rates for unpaid debts. For example, it’s common for director’s guarantees to include a charge, giving the creditor an interest in any personal property the director owns. Also, director’s guarantees often include a protection to the creditor that the director will pay any legal or other costs that add up when the creditor is trying to collect debts under the guarantee. This may include all costs of recovering the debt, including:
This could add a substantial amount of money to the debt owed.
5. The Liability May Be Continuing and Unlimited
Directors often think any obligation under a director’s guarantee ends after:
- they stop acting as a director;
- the agreement is terminated; or
- the company stops trading.
However, director’s guarantees are usually continuing and unlimited. The obligations to pay the company’s debts will often continue even after you have stopped being a director.
Directors are often unaware of the full obligations they are committing to when they sign a director’s guarantee. If liability under a director’s guarantee is triggered, it can affect your personal finances or leave your personal assets vulnerable. You should get legal advice before signing a director’s guarantee to ensure you are aware of all your obligations. If you have any questions about director’s guarantees or need assistance with reviewing a director’s guarantee, you can contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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