In today’s current climate when a company is able to secure bank lending, it is common practice for the bank to ask for a personal guarantee from directors. Rupert Wright, a corporate services specialist with law firm Charles Lucas & Marshall, explains the implications of signing a personal guarantee.
A Court of Appeal decision earlier this year should act as a warning to directors who sign personal guarantees.
The Court of Appeal ruled that a director was liable for more than £330,000 almost seven years after he had resigned from the company. The lender provided the company with a significant amount of credit. After the company fell into arrears, the lender sought personal guarantees from the directors which they at first declined to give. When the lender threatened to withdraw the company’s credit, the directors signed a written guarantee giving rise to joint and several liability for all sums due to the society by the company. At the time of signing, the personal guarantee was limited to £200,000.
In 2006 when the director resigned as one of the directors of the company and sold his shareholding, the company’s debt to the lender stood at approximately £400,000. This increased so that at the time when the company ceased to trade, the debt to the lender had increased to £700,000.
The director challenged the lower court ruling on a range of issues, but the court held in favour of the lender.
The case illustrated that the courts will look at the wording of a document and if it is clearly an all monies type of guarantee, the credit limit can be varied and the director’s liability would not be limited to the credit limit at the time the guarantee was given or the limit in place when they resigned from the company. Directors when resigning from a company should ensure that they secure their release from any personal guarantee given, or at the very least, seek an indemnity from remaining directors.
Generally directors should seek legal advice when committing themselves to guarantees, particularly when guaranteeing someone else’s debt. They need to know if the person asking for the guarantee has the ability to service and repay the loan. They need to check this person’s credit history and they need to be sure that this person can meet all the borrower’s obligations.
Also, the guarantor should note that generally lenders are not obliged to notify guarantors of a borrower’s financial difficulty. In fact, the bank would be in breach of its duty of confidentiality to the borrower if it did so.
Guarantors should also note the bank does not have to pursue the borrower for the debt. Once the borrower is in default, the bank has a right to pursue the guarantor. If more than one guarantor has guaranteed the borrower’s debts the bank can choose who to pursue.
In summary, it is vital that legal advice should be sought at all times before directors enter into guarantees so that they are aware of its implications.
For further information contact Rupert Wright on 01635 521212 or firstname.lastname@example.org
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