Personal Guarantees from Company Directors
It is a standard practice for companies in some instances to ask for a personal guarantee from a Company Director but are they enforceable? The answer is very much Yes and they can be a valuable tool in providing recourse to a company’s Director in the unlikely event the company defaults on any credit facility you provide for them.
It is a valuable sign that a Director wholly believes that his company will be able to pay the sum owing to you and can be a valuable insurance for your business.
What can Director’s be personal guarantors for?
A Director’s personal guarantee may not be viewed as customer friendly so is normally reserved for usage with start up companies or SME’s with little or no trading history. Obviously, this is always entirely at your discretion but certainly worth consideration.
As you should always be credit vetting any new companies who are seeking any form of credit terms, it may also be worth applying due diligence to the director also. Why? Well if their company defaults on their payments and the director becomes personally liable then you should know whether they have the means to discharge the debt.
There are a number of instances where a Director’s personal guarantee may be used such as:
- Loans for finance from Banks or other financial institutions
- Leases for Commercial property
- Invoice/asset finance agreements
- Deals for the supply of trade/goods
- Franchise deals
It is always worth having any ‘personal guarantee’ drafted by a commercial solicitor to ensure it is binding and valid in all respects. You can purchase standard templates relating to this but we would always recommend that any legal contract is drafted by an expert and relates specifically to your business.
What happens if the Personal guarantee needs to be enforced?
If the Directors company defaults on your arrangement and they are called upon as a guarantor, the next step can vary dependant on the amount owed and the creditor in question. Firstly, you would notify the Director themselves via a letter (usually to their home address) that they are required to make immediate payment in accordance with the terms of the guarantee.
If they fail to respond or indeed pay, then a more appropriate course of action will be required. As mentioned, you will have looked into the Director in question’s ability to pay and therefore be sure that there is a reasonable prospect of recovering the sum owed to you.
Quite often the Director that has given the Personal Guarantee will try and dispute that there is any personal liability however if the guarantee they signed at outset is done correctly, this should merely be viewed as a smokescreen to try to evade payment.
If you need help recovering a debt that is owed personally from a Company Director, speak to our expert New Business team today by calling them on 0333 . We have years of experience of dealing with such matters and have successfully recovered debts arising from this situation.