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As companies struggle to pay debts, lenders and suppliers are increasingly looking to directors to pay those debts where the director has given a personal guarantee. 

What is a director’s personal guarantee? 

Directors and shareholders are not usually liable to pay the debts of a company. However, suppliers and lenders often ask a director to personally guarantee a loan or credit account. If a personal guarantee is entered, the director guarantees a liability of the company. 

For a personal guarantee to be enforceable, it must be in writing. It can be in either a contract or a deed, but these must be executed correctly. 

When can a personal guarantee be enforced?

Whether the guarantee is enforceable is highly dependent on the facts, in particular:

  • What the guarantee covers.
  • What has happened since the guarantee was given.

The liability which is guaranteed must be clear in the guarantee itself. If it is vague, the personal guarantee may not be enforceable.

Things such as changes to the credit limit or payment terms may limit or extinguish the director’s liability under the personal guarantee. 

Other events such as the provision of security by the company (whether or not that covers the full sum due) may also limit or extinguish liability under the personal guarantee.

Some guarantees require a particular process to be followed before they can be enforced against the director, e.g. certain notices may have to be served on the director within particular time frames. The guarantee will only become enforceable if these terms are adhered to.

What should you do if a supplier tries to rely upon the guarantee? 

If a lender or supplier is intending to enforce a personal guarantee against you, you should: 

  • request a copy of the original personal guarantee from the lender or supplier. If the lender or supplier cannot produce this, it will be difficult for them to proceed with a claim
  • prepare a history of the account detailing changes to credit limits, payment terms, security, etc
  • request details of the sum due and how it has been calculated
  • check whether any required process has been followed.

Finally, it is recommended that you take advice, guarantees can sometimes be challenged on factual and technical grounds. 

What you should not do if a supplier tries to rely upon a guarantee? 

If the company is still trading there may be a temptation to cause the company to discharge debts which you have personally guaranteed in preference to other debts. You should not do this. In the event of the company becoming insolvent, the liquidator can challenge any transaction which are preferences and you may be forced to return funds to a company. If you think that your company is or may become insolvent, you should contact your solicitor, accountant, or an insolvency practitioner.

Our dispute resolution team are available to advise directors on liabilities under personal guarantees. Please contact Mairead McErlean.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.