One of the many formal and financial agreements or contracts you can be a party to as a company director is a personal guarantee, and it is a commitment that you should always seek guidance about from your commercial lawyers. This is especially the case because agreeing to a personal guarantee can place a huge legal and financial burden upon yourself, and it is a burden that can have huge financial implications for you and your family
For those who may never have come across a personal guarantee, they are an agreement by an induvial to guarantee to pay a debt of a third party. In the business world, the most common example is a company director making a personal guarantee for a loan taken out by a business they own or for which they are a director.
Under a personal guarantee, your assets including your income, savings, stocks, shares, land, and property may all be liable to be used or liquidated to clear the debt in question, if the third party that owes it defaults. You also may want to speak to property lawyers about your land and property involved.
Given the significant impact a personal guarantee can have on your finances, we repeat that if ever you are considering entering such an agreement that you seek advice from a commercial lawyer. In addition, there are several ways in which you can reduce your exposure under a personal guarantee before you sign it. Here are five of those ways.
Place A Cap On Your Liability: Any personal guarantee you commit to should not leave you exposed to unlimited financial risk. How you achieve that is to insist that the personal guarantee has a monetary cap and that the maximum amount for which you could be liable to repay is explicitly stated in the agreement.
Ensure There Is A Time Limit: Just as having an open-ended liability, it is also not in your interests to allow a personal guarantee to have no limits to the length of time it holds you liable. This is why you should ensure there is an expiry date stated in the personal guarantee that releases you from your liability or allows it to be renegotiated.
Limit Which Of Your Assets Are Included: You must be vigilant should the lender try to include what is known as a charging clause. This clause can extend the assets which are subject to the personal guarantee to your land and property. Avoid having a caveat applied to your property by insisting that no charging clauses can be included in any personal guarantee you agree to.
Check Any Applicable Interest Is Reasonable: Not every personal agreement will be subject to interest being charged, but many will be. The key point is that the rate of interest which is to be applied must be reasonable. This is crucial because the interest will add to the amount owed by you and thus the lower it is the less your financial exposure will be.
Insist That Your Liability Ends Should You Leave The Company: There have been several examples of a company director leaving a company, but still being liable for its debts should it default, due to a personal guarantee. This is a situation that can be easily remedied by including a clause within the agreement which releases you from your obligations should you ever leave the company.