Avoiding Directors’ Guarantees

Directors are under a lot of pressure nowadays, those pressures ranging from dealing with employees’ pensions to drawing dividends to paying corporation tax to a myriad of other matters. However, one issue becoming more regular, in these economically uncertain times, are claims against directors enforcing guarantees they may have given.

What is a director’s guarantee?

A director’s guarantee, or personal guarantee, is a document which when signed by the director holds them personally liable for certain debts of the company. If a claim is made under the guarantee, the director must pay that company debt, and if this is not done, then they can be taken to court by the creditor and potentially made bankrupt.

When would a director give a guarantee?

It is fair to assume that a director will only give a guarantee when it is demanded by the creditor at a time when he/she may be under extreme pressure to sign that guarantee. Consequently, the director will be giving a guarantee at a time when he/she may be confused as to what is and is not being guaranteed and where there is an unfair bargaining position between the director and the creditor seeking the guarantee.

How should a director deal with any claims under a guarantee?

In this nightmare scenario, the answer is to focus on the 3 Cs:

1. Construction – Check the contractual construction of the guarantee.

• Is it enforceable in law?
• Does it have certainty?
• Does it have the necessary contractual elements?
• Is it dated? Does it specify the correct parties?

There are many questions, the answers of which could frustrate the enforceability of the guarantee.

2. Complications – Check if the terms of the guarantee have been changed by subsequent correspondence between the director and the creditor.

• Was there an agreement to increase repayments which would limit the amount potentially claimed under the guarantee?
• Has a company given security which has removed the guarantee?

3. Compromise – The creditor will be as hesitant as the director in going to court to enforce a guarantee.

• Can a settlement be negotiated?
• Does the creditor really want to pursue the director through the court, where the decision of the court is always uncertain?

Conclusion

If you are a director facing a claim against you under the terms of a guarantee, there is no need to panic. As you can see from the 3 Cs above, there are many reasons you could in fact not be held liable under the guarantee. For further advice on how deal with a claim under your guarantee, please contact Tony Sampson using the details below.