If you are a director of a company and you are entering into an agreement, you will be required to sign a director’s guarantee. It is a serious legal document, and many don’t realise that the conditions and obligations may last forever. If you would like the learn about the liabilities of a company director, check out this Business Kitz blog, or continue reading and this Legal Kitz article will go into more detail as to what is a director’s guarantee.
What is a director’s guarantee?
A personal guarantee signed by directors when a firm enters into an arrangement, such as a credit contract, lease, or financing loan, is known as a director’s guarantee. If you sign a director’s guarantee, you will be held personally accountable for any obligations that the company is unable to pay. Before signing a director’s guarantee, it’s important to understand all of your duties under the guarantee, including how long those requirements last.
How long does a director’s guarantee last?
Whilst the conditions of a directors guarantee can vary, it’s important to read and understand the conditions before signing, as some guarantees may last forever. Many directors are shocked when approached by a creditor as they weren’t aware they are legally liable for a company’s debts owed under any agreements. This often occurs many years after the original signing of the guarantee, or when the director is no longer employed by that company. In other words, under a director’s guarantee, you might be held accountable for debts incurred by those operating the firm long after you’ve gone.
Director’s guarantee come in various forms with certain terms and conditions that limit your liability to specific time or transactions. However, the director’s promises are most commonly continuous or continuing. This signifies that the responsibility is perpetual and will apply even if:
- you have resigned as director of the company;
- the company has stopped trading; or
- the company has been deregistered.
How to get out of director’s guarantee?
There are a few ways to get out of a director’s guarantee. One option is to request that the creditor or other parties to the arrangement release you from the guarantee. If you decide to quit as a director and leave the firm, for example, you might contact each creditor and ask them to release you from the guarantee. You might also ask incoming directors to take over the current director’s guarantee in your place. There is no guarantee they will agree, but if the firm is otherwise following the terms of the arrangement and paying its payments, the creditor may consider it.
You may be able to have the guarantee set aside if you feel it was obtained under circumstances that indicate there was an element of:
- misrepresentation;
- misleading or deceptive conduct;
- mistake; or
- unconscious conduct.
If you can demonstrate this, the promise may be declared void or unenforceable. Keep in mind that a director’s guarantee cannot be enforced while a business is in administration, unless the court allows permission.
What if I can’t pay the debt owed under a director’s guarantee?
If a creditor pursues you for debts owing by the firm under a director’s guarantee and you are unable to pay, the creditor may obtain a judgement against you. If they are successful, they can use specific means to enforce the ruling, such as:
- withholding a certain portion of your wages directly from your employer to pay back the debt;
- presenting you with a property warrant; or
- force you to declare bankruptcy.
To avoid this from happening, once you become aware of the debt you should contact:
- other company directors may be responsible for the same debt under the director’s guarantees. You might be able to work out a debt-sharing arrangement; or
- the creditor and try to work out a payment plan that you can afford, such as instalment payments or a lump sum payment at a later date.
How to avoid a director’s guarantee?
A creditor may refuse to enter into an arrangement with a corporation unless the director agrees to sign a director’s guarantee. If the company requires loan agreement or credit application to do business, you may be forced to sign the guarantee. However, in some situations, parties may examine alternatives and measures that might reduce the impact of the assurance.
Legal advice
If you are deciding to enter or leave a director’s contract, it is recommended to seek legal advice and assist in your decision and to ensure you fully understand all obligations and terms. Our sister company Business Kitz has a range of contracts and agreements and free customer support to aid your business operations and here at Legal Kitz, we can assist you with any concerns you may have. You can book a free 30-minute consultation with our experienced and highly qualified team via our website now.