Director guarantees can be used to leverage payment from a business, this can be of huge benefit to creditors.
What is a director guarantee?
A director guarantee is a legal commitment for the director to pay if the company doesn’t under the terms agreed, this can be for a loan, lease or for other financial arrangements and contracts.
The agreement makes the director personally liable and puts his or her assets at risk if the businesses has not met their financial obligations.
Why might you ask for a director to be guarantor?
- If you are doing business with a company that is a start-up and has a limited trading history
- If you know that the company doesn’t have assets
- If you are working with a business that hasn’t passed your credit checks or doesn’t have a good credit rating as a business
- If you have experienced previous issues with the company you’re doing business with
There is more personal risk for the director you are doing business with and they will be effectively being asked to ‘put their money where their mouth is’. For a creditor this is a win-win situation as the director is likely to own property, a vehicle and other valuable assets that can be used if there is an issue with payments.
Joint and several liability for director guarantors
Where there is more than one director, you should ask for the directors to sign for joint and several liability, this means that all directors are jointly liable for any company debt as well as being individually liable. This means that you can pursue one or more of the directors named in the agreement. It will be worth ascertaining which of the directors has the most assets and pursuing them for the full debt. Once the debt has been repaid that will be the end of the matter.
You can download a director guarantee template here.
David is an authorised High Court Enforcement Officer and our Director of Corporate Governance