Personal guarantees can expose directors and shareholders to the whole of a company’s debt, even when others have also signed. David Farmer, commercial litigation partner at Wilson Browne Solicitors, explains what to check before committing and how a deed of contribution can help share the financial burden.
Signing a personal guarantee is a commitment that can put your own assets at risk. Before agreeing, you need to understand the extent of your liability and what the lender could require you to pay.
Many lenders require legal advice before you sign. This helps establish that you understand the guarantee, recognise the implications for your personal assets and are entering into the arrangement freely, without coercion.
Even where a lender does not insist on advice, the terms deserve careful attention. You should establish whether the guarantee limits your liability, which debts and obligations it covers and how you can bring it to an end.
It is also important to understand what happens if you cease to have control or influence over the company, and how the arrangement works where several directors or shareholders provide guarantees.
Taking advice before signing helps you understand your exposure and the commitments you are making.
Where several directors or shareholders give a guarantee, liability is usually ‘joint and several’. Subject to any agreed limits, this means the lender can pursue any one guarantor for the entire debt.
The lender does not have to claim against everyone or exhaust other recovery routes first. It may pursue several avenues at once, or concentrate on the person it considers most likely to be able to pay.
Most lenders will not agree to divide liability between guarantors. However, the individuals providing the guarantees can enter into a separate deed of contribution to agree how they will share the burden.
A properly drafted deed allows a guarantor who has paid the lender to require contributions from the other individuals, in accordance with its terms. Those contributions usually reflect their respective shareholdings, although the parties can agree a different allocation.
The deed does not alter the lender’s rights. If the guarantee is enforceable, the lender can still require one guarantor to pay the entire debt, subject to any agreed limits. The deed provides a means of seeking contributions from the other guarantors afterwards.
For directors and shareholders considering personal guarantees, agreeing how to share that risk can therefore be an important part of the preparation before signing.
Before signing a personal guarantee, make sure you understand what is at stake. To discuss your liability and whether a deed of contribution could help, contact Wilson Browne’s commercial litigation team on 0800 088 6004 or get in touch online.
