When a director resigns, they continue to be a guarantor on any personal guarantees (PG) they have signed, unless the PG expressly states that leaving the company releases the guarantor from their contractual obligations. This is unlikely and usually the creditor must confirm in writing that a guarantor is released. As such, a director who has resigned remains liable for the company’s obligations that they have guaranteed, even though they no longer have any say in how the company is managed and run.
Act with caution
Giving a personal guarantee for a company’s debts takes away the limited liability protection you would normally have as a director or shareholder. It is important to get independent legal advice before entering into one because once you give the guarantee, you are bound by it. There are serious financial consequences if you are unable to discharge it. Many directors invest in professional indemnity insurance to mitigate the risks and protect their personal assets. The Law Society have published an article about PII.
Can I get a release from a PG?
It may be possible to agree to a replacement guarantor or another form of security with the creditor. It is vitally important to look into obtaining a release from personal director guarantees when leaving a debtor company. At Law firms such as Parachute Law director guarantee advice is impartial and will help you understand the risks. A PG can be revoked if it was fraudulent or if there is found to have been undue influence, misrepresentation, or forgery. The liability can be discharged through repaying all outstanding liabilities under it. This will release the guarantor, although such release may be conditional for a while before becoming final.
Can I limit my liability?
It is sometimes possible to limit liability under a PG to a specified amount, plus costs and interest. It may also be possible to cancel the guarantee, although it’s likely the liability will be fixed at the amount owed at the point of cancellation and the guarantor is still liable to pay it if demanded.
What about joint guarantors?
PGs are usually drafted so that each guarantor is jointly and severally liable for any monies and obligations owed. The creditor can pursue some or all of the guarantors in recovering the debt owed. It is not possible to pay off your share unless this has been agreed with the creditor.
Can I pay off a jointly held director guarantee?
It is possible to pay a sum on behalf of another guarantor and you would still have a right of contribution from non-paying guarantors for anything you pay beyond your share. Guarantors can make a claim against the company for anything they have paid to the creditor on behalf of another party. If two guarantors are jointly and severally liable for £50,000 and one paid it off in full, they would be able to pursue the other guarantor to recover £25,000.