It is common practice for company directors to sign personal director guarantees on loans for their business.
A personal director guarantee can be a necessary way to release credit lines that would not otherwise be accessible; however, company directors need to do their homework and take legal advice from a firm such as https://www.parachutelaw.co.uk/director-guarantee to ensure it is the right choice for their circumstances.
In what circumstances can a personal guarantee be triggered?
This will almost certainly be when a firm either misses payments or becomes insolvent. Any attempt to dissolve a company or appoint administrators will also trigger an immediate calling-in of the loan.
What if a director has left the company?
Leaving a company does not necessarily mean a director gets out of their agreement with the lender. Departing directors can ask to be released from the guarantee; however, the lender will be likely to ask for another guarantor and not release the departing director without this. Directors should think carefully about resigning, as they may be held liable but have no control over how the company is run.
With many businesses feeling the impact of the cost of living crisis on BAU (business as usual) costs and the long-term impact of the pandemic still straining finances, the likelihood of firms becoming insolvent is higher than it has been since 2008. Personal guarantees may therefore be called in to honour debts.
If a director is not in a position to pay the loan, the lender may pursue the loan and add further interest, legal and recovery fees and any default charges. They may go to court to secure a judgement for an order charging land (OCL) against your property. They can also take steps to force bankruptcy.