A Director’s Dilemma: To Guarantee, or Not To Guarantee?

It is becoming more common for company directors to personally guarantee their company’s obligations. These personal guarantees (PGs) may be used to secure leases, obtain working capital, or reassure suppliers. While the terms vary depending on the agreement, the fundamental concept is the same: a director agrees to be personally responsible if the company fails to meet its obligations, often including debt repayment.

Before signing a PG, directors should thoroughly examine the terms and get legal advice. Here are some key considerations to keep in mind:

• Is the PG absolutely necessary? Review whether the PG is a requirement or simply a standard term. Don’t assume it’s mandatory—there may be room to negotiate its removal or reduction.
• Have you evaluated your personal risk? Understand what personal assets you own and what could be at risk if the guarantee is enforced. Asset protection strategies, like placing certain assets into a trust, may help reduce exposure.
• Is your liability limited or unlimited? An unlimited PG means you could be liable for any future debts to the guaranteed party. Aim to cap your liability, whether by setting a maximum dollar amount or limiting it to a specific timeframe.
• Are you jointly and severally liable? If more than one person signs the PG, each signer could be held accountable for the entire debt. Try to arrange shared liability or enter into an agreement that outlines each guarantor’s responsibility and the right to claim contributions from others if necessary.
• Does the document include an indemnity? Some PGs include indemnity clauses, which can significantly increase your liability. If this is the case, seek legal advice to fully understand your obligations.
• Is your obligation ongoing? Your liability might not end automatically—even if the business arrangement changes. For example, if a lease you guaranteed is transferred to another entity, your responsibility may continue unless you obtain a formal written release.
• What’s the process to exit a PG? Keep a detailed record of any PGs you sign and understand how to terminate them. Some may end with written notice, while others could persist for a certain period. This is especially important if you plan to step down as a director or if the company is sold.
• What happens in case of default? If the company can’t repay its debts and you’re unable to cover them, you could face personal bankruptcy, which would also disqualify you from being a director. It’s critical to understand both the company’s financial health and your own before committing to a PG—and continue monitoring both for as long as the PG is active.

While PGs carry risk, they can be a necessary part of doing business. By understanding the terms, asking the right questions, negotiating when possible, and getting professional advice, directors can better manage their exposure when providing a personal guarantee.

If you have any questions about your liability for a PG, please do not hesitate to let me know. I am here to help.

DISCLAIMER: This article is for informational purposes only and does not constitute legal advice.