Directors, particularly of OMBs and SMEs, will be often called upon to give a personal guarantee for their company’s debts. The request might come from the company’s bank, landlord or supplier. Particularly where companies are relatively new and/or have little in the way of fixed assets, there is often no practical alternative but to give the guarantee.
Guarantee or indemnity?
There is a technical distinction between a guarantee and an indemnity. The distinction has little relevance in practice because most standard form documents that directors are asked to enter into tend to include a guarantee and indemnity. These will typically be referred to as a personal guarantee or “PG”.
Terms of guarantee
The guarantee can be for “all monies”, which means that the director is liable for the full extent of the company’s debt to the party with the benefit of the guarantee. It is more usual for a guarantee to be capped at a particular agreed level.
The creditor may also insist on some security (for example over the guarantor’s family home) to give comfort that the guarantee can be enforced.
A guarantee must be in writing and signed by the guarantor. It is good practice for the guarantor to get independent legal advice, particularly if they do not directly benefit from the subject matter of the guarantee (for example the spouse of a company director).
Once a guarantee is called upon, the guarantor director has a right to be indemnified by the company. Often this will be of no practical benefit because if the company were able to pay the debt in the first place the guarantee would not have been called upon. However, if the director owes money to the company separately (for example, under a director’s loan account) the director will be allowed to set off whatever he or she has had to pay out under the guarantee against the sum owing to the company.
The guarantor will also have a right of subrogation. This allows the guarantor to step into the shoes of the creditor once the guaranteed liability has been paid off. For example, this might allow the guarantor to prove in the company’s liquidation and recover part of the sum paid under the guarantee.