Director’s Guarantees can be both a business’ best friend and a director’s nightmare depending on the situation. Often directors of a company will sign the document without obtaining legal or financial advice, maybe because they sign them as a matter of course or because they don’t realise the consequences. So what is a Director’s guarantee and when should you get legal advice before signing one or after signing it?
What is a Director’s Guarantee?
These are most commonly requested in business to business transactions. If you are a director of a Limited company, there is limited liability for all directors. This means that if the business were to go into liquidation or administration, you would not personally be liable for the company’s debts even if the company were to fail to pay them. This is unless you have signed a Director’s Guarantee.
A Director’s Guarantee is a form or declaration a director can sign stating they will personally cover the debts to a certain company or individual owed by the company of which they are a director. For some companies, having such a document signed is the only way in which they will do business, especially when it comes to very large transactions. This has very little effect on the director themselves, unless the business they are a director of, goes into administration or for whatever reason, fails to pay their debts.
How enforceable is a Director’s Guarantee?
If a Director’s Guarantee is drafted correctly it can be easily enforceable by the company owed money. Once they realise they are not going to recover their debts from the company itself, they can pursue you in the County Court for repayment of the debt from you directly. Sometimes, such a debt would be minimal if the business to business transaction was a one-off. Alternatively, it can leave a director with a huge liability, especially where the contract between the companies is an ongoing one.
If you as a Director, do not have the money to pay the debt owed, you could end up losing a substantial amount of money, and even the property you personally own if the company is successful in a County Court claim.
When should I obtain legal advice?
The simple answer is you should always obtain legal advice prior to entering into a business to business contract or signing up to a Director’s Guarantee. Some may have different wording to others so if you are unsure in what you are signing up to, you should obtain legal advice. You should also obtain legal and financial advice at the first opportunity if it looks like your business is struggling both in a personal and business capacity.
In addition, if you receive a letter from a company after your company has gone into administration asking for payment of monies in line with a Director’s Guarantee, you should seek legal advice immediately, especially if Court action is threatened.
When can a Director’s Guarantee be used to protect my business?
While a Director’s Guarantee can end up being a nightmare for those who sign them, they can be a really helpful tool for a business to protect their money in transactions with new clients or customers. It can be nerve wracking for a business to enter into a transaction with a new client, particularly when it is a large transaction and payment can’t be made up front. In these situations, a Director’s Guarantee may be the perfect solution.
You should always obtain legal advice for some drafting tips on the document prior to using them to protect your business. If you were to fail to do so, you may miss something which could be the difference between having your money protected and losing it.
If you require any further advice in relation to the above, please contact our Commercial or Litigation Departments on 0116 255 1811.
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