When a company needs finance, lenders will often ask a director to sign a personal guarantee. This can make the difference between a loan being approved or refused, but it also exposes the director’s personal assets if the business cannot repay.
Before signing, it’s important to understand exactly what a director’s personal guarantee is, how it works under UK law, and what can happen in insolvency. This guide provides an overview in plain English.
This article is for general information only and does not constitute legal advice on any specific situation.
Summary
Read on to find out more about:
- What is a Personal Guarantee?
- What is a Director’s Personal Guarantee?
- When are Personal Guarantees Required?
- How Personal Guarantees Are Enforced in the UK
- Personal Guarantees and Business Insolvency
- How Do Personal Guarantees Affect Directors’ Duties?
- Advantages and Disadvantages of Signing a Director’s Personal Guarantee
- Personal Guarantee vs Personal Guarantee Indemnity
- Resigning as a Director: What Happens to Your Guarantee?
- What Happens If You Default on a Personal Guarantee?
- How Our Personal Guarantee Solicitors Can Help
- FAQ
What is a Personal Guarantee?
A personal guarantee is a legally binding promise by an individual to repay a debt or fulfil an obligation if the primary borrower does not. In the business context, it usually sits alongside a loan, overdraft, lease or other credit agreement and gives the lender an extra route to recover what is owed if the borrower defaults.
In UK practice, a guarantee is typically:
- A separate contract (and often drafted as a deed), and
- Expressly linked to a particular facility or to “all monies” owed under a broader banking relationship.
Some guarantees connected to regulated consumer credit agreements may also be caught by the Consumer Credit Act 1974, which imposes additional form and content requirements and, in some cases, “unfair relationship” protections.
Secured vs Unsecured Personal Guarantees
A secured guarantee is backed by specific collateral, for example:
- A legal charge over a director’s home or investment property
- A charge over other valuable assets such as land, vehicles or investments
If the borrower defaults and the guarantee is called, the lender can look to enforce its security over that asset (subject to proper legal process) to recover the outstanding amount.
However, an unsecured guarantee is not backed by a particular asset. Instead, the guarantor is personally liable, and if they do not pay when demanded, the lender can pursue them through the courts and enforce any judgment against their general assets, for example, by:
- Obtaining a County Court Judgment (CCJ) or High Court judgment
- Applying for a charging order over property
- Seeking attachment of earnings or, in serious cases, presenting a bankruptcy petition
What is a Director’s Personal Guarantee?
A director’s personal guarantee is a guarantee given by a company director, promising to repay a company debt personally if the company cannot. If the company defaults, the lender can pursue the director up to the amount of the guarantee, regardless of the company’s separate legal personality.
In practical terms, this means:
- The director’s limited liability as a shareholder does not protect them in respect of the guaranteed debt.
- Their personal assets, including savings, investments and potentially their home (depending on the security position), may be at risk if the guarantee is enforced.
Joint and Several Personal Guarantees
Where there is more than one guarantor (for example, several directors), the guarantee is often expressed to be joint and several.
- Each guarantor is individually and collectively liable for the full amount of the guaranteed debt.
- The lender can choose to pursue any one guarantor for up to the full balance, not just a “share” of it.
If one guarantor ends up paying more than their fair share, they may have a separate right of contribution against the others, but that is a matter between guarantors; it does not limit the lender’s rights.
When are Personal Guarantees Required?
Lenders and creditors typically ask for a director’s guarantee when they are uncertain about the company’s ability to repay, or where the business has limited trading history or assets. Common UK examples include:
- Small business loans and overdrafts, especially for new companies or those without substantial security
- Start-up funding where the business has no track record
- In commercial leases, landlords often insist on a director’s guarantee for a new tenant company
- Asset finance and hire purchase, e.g. for vehicles or equipment
- Trade credit/supplier accounts, such as builders’ merchants or wholesalers
- Invoice finance and other working capital facilities
In all of these situations, the guarantee is the lender’s way of saying:
“If the company can’t pay, we want reassurance that someone personally will.”
How Personal Guarantees Are Enforced in the UK
A personal guarantee usually becomes enforceable when there is an event of default under the loan, lease or credit facility, for example, missed payments or breach of covenants.
Typical enforcement steps are:
1. Demand
The lender issues a formal demand to the guarantor, referring to the guarantee and stating how much is due.
2. Court Proceedings
If the guarantor does not pay or agree terms, the lender may issue a claim in the County Court or High Court. If the claim is successful (or not defended), the lender obtains a judgment.
3. Enforcement of Judgment
Depending on circumstances, the lender may seek:
- A charging order over property (and potentially an order for sale)
- Attachment of earnings (for employed guarantors)
- Third-party debt orders (against sums owed to the guarantor)
- A bankruptcy petition is filed if the debt is large enough and unpaid
Can a Personal Guarantee Be Challenged?
In some cases, it may be possible to challenge the enforceability or scope of a guarantee, for example:
- Defects in execution, a guarantee that is intended to be a deed but is not properly signed/witnessed, could be open to challenge.
- Misrepresentation or undue influence, where the guarantor was misled about the effect of the guarantee, or pressured into signing without proper explanation or independent advice. Cases such as Credit Lyonnais v Burch illustrate how serious undue influence can render a guarantee unenforceable.
- Unfair relationship (Consumer Credit Act 1974), in some regulated credit situations, the court can look at whether the relationship between lender, borrower and guarantor is unfair under sub-section 140A-C CCA.
These arguments are fact-specific and not all guarantees are covered by consumer legislation (particularly where the guarantor is a company director acting for commercial reasons), so early advice is essential.
Personal Guarantees and Business Insolvency
Personal guarantees often become critical when a company is in financial difficulty or facing insolvency.
If the company cannot pay its debts and enters liquidation, administration or another formal process, the creditor will normally:
- Seek repayment from the company’s assets; and
- Pursue any guarantors for any shortfall under the terms of the guarantee.
Preference Payments and the Insolvency Act 1986
Directors who have given personal guarantees need to be particularly careful about which creditors are paid as insolvency approaches.
Under section 239 Insolvency Act 1986, a company gives a preference if:
- It does something (such as paying a particular creditor)
- Which puts that creditor in a better position than others would be in on insolvency, and
- It is influenced by a desire to prefer that creditor, at a time when the company is insolvent or becomes insolvent as a result.
A classic example is where a director ensures a bank or supplier, whose debt they have personally guaranteed, is paid in full shortly before liquidation, while other creditors are left unpaid.
If a preference is found:
- The court can order the transaction to be set aside or reversed; and
- The director may face personal consequences, including misfeasance claims or director disqualification in serious cases.
The key point is that directors must not allow their personal guarantee exposure to dictate which creditors are paid if the company is insolvent or near-insolvent.
How Do Personal Guarantees Affect Directors’ Duties?
Personal guarantees blur the line between the director’s personal interests and their duties to the company.
Under the Companies Act 2006, directors must:
- Promote the success of the company (s.172), and
- Avoid situations where their personal interests conflict with the company’s interests (s.175).
A guarantee can create:
- Conflicts of interest, if a director has personally guaranteed one creditor, they may feel pressure to favour that creditor over others, particularly as insolvency looms.
- Tension with creditor-interest duties, as insolvency approaches, directors must have proper regard to the interests of creditors as a whole; prioritising a guaranteed creditor can conflict with this.
- Disclosure obligations, personal guarantees and related conflicts should be disclosed to the board and, where appropriate, minuted and managed formally.
Handled badly, these issues can contribute to:
- Allegations of breach of duty
- Claims in misfeasance or wrongful trading
- Evidence used in disqualification proceedings
Advantages and Disadvantages of Signing a Director’s Personal Guarantee
Personal guarantees are not always negative; they can unlock finance that would otherwise be unavailable. But the risks are significant.
Potential Advantages
- Increased Access to Finance: Lenders may be more willing to extend credit to a company with limited assets or a track record if a director provides a personal guarantee.
- Better Terms: Guarantees can sometimes lead to more favourable interest rates or higher facilities, as the lender sees reduced risk.
- Signals Commitment: Providing a guarantee can demonstrate the director’s confidence in the business and commitment to its success, which may assist relationship-building with lenders, landlords or investors.
- Possibility of Caps or Limits: Some guarantees are limited to a specified amount, or to a particular facility rather than all liabilities, which can at least define the maximum exposure.
Key Disadvantages
- Personal Liability and Asset Risk: The director’s personal assets can be at risk if the guarantee is called; in extreme cases, this can lead to personal bankruptcy.
- Impact on Credit Rating: If a guarantee is enforced and not paid promptly, the resulting court judgment or bankruptcy will typically damage the guarantor’s credit record, affecting future borrowing.
- Commercial and Personal Strain: Enforced guarantees can create tension between co-directors or shareholders (for example, if only some directors guaranteed the debt).
- Limited Control: Once given, the guarantor may have limited control over how the borrower uses the funds or runs the business, but still carries the risk if things go wrong.
Reducing the Risk Before You Sign
Before agreeing to a director’s personal guarantee, it is sensible to slow down, read carefully and, ideally, get independent advice. Consider the following steps:
1. Take independent legal and financial advice
Understand exactly what the guarantee covers and what alternatives might exist.
2. Check the scope: specific or “all-monies”?
Is the guarantee limited to a particular loan or facility, or does it cover all present and future obligations of the company to the lender?
3. Negotiate caps and limits where possible.
Can the liability be capped at a fixed amount, or reduced over time as the debt is repaid?
4. Clarify when liability ends.
Does the guarantee continue even if the facility is refinanced or increased? What happens on repayment, or if you resign as a director?
5. Understand default and enforcement triggers
What counts as default? How quickly can the lender demand payment under the guarantee?
6. Consider whether all directors should share the risk
Are multiple directors giving guarantees? If not, is it fair and sustainable that only one director carries the burden?
7. Look at Personal Guarantee Insurance (PGI)
Personal Guarantee Insurance is now available in the UK for many business loans. It can cover a percentage of the guaranteed amount if the company becomes insolvent and the lender calls on the guarantee. It does not stop the lender from enforcing the guarantee, but it can help reduce the financial impact on the guarantor.
8. Take time to decide and keep written records
Don’t sign under pressure. Keep copies of the guarantee, the facility documents and any advice you have received.
Personal Guarantee vs Personal Guarantee Indemnity
A personal guarantee and indemnity go a step further than a simple guarantee.
- A guarantee is usually a secondary obligation; you agree to pay if the borrower does not.
- An indemnity is a primary obligation; you agree to compensate the lender for losses and costs arising from the borrower’s default.
Many modern documents combine both. This can:
- Strengthen the lender’s position, and
- Make some technical defences (for example, based on changes to the underlying loan) more difficult to run.
It is important to read the wording carefully and understand that a “guarantee and indemnity” is usually more robust in favour of the lender than a simple guarantee.
Resigning as a Director: What Happens to Your Guarantee?
Resigning from the board does not automatically release you from a personal guarantee.
- The guarantee is a separate contract between you and the lender.
- Unless the lender agrees in writing to release or vary it, you can remain liable even after you have left the company.
You may be able to:
- Negotiate a release or substitution (for example, another director providing a fresh guarantee), or
- Seek to limit liability on future borrowing,
But the lender is not obliged to agree. It is important to address these issues before or as part of any exit from the company.
What Happens If You Default on a Personal Guarantee?
If a director cannot pay when a guarantee is called, the consequences can be serious:
- Demand and Legal Action: The lender may issue a formal demand, then bring court proceedings if payment is not made.
- Judgment and Enforcement: If the lender obtains judgment, it can use various enforcement tools, such as charging orders over property, orders for sale, attachment of earnings, or, in some cases, a bankruptcy petition.
- Impact on Credit and Reputation: County Court Judgments and bankruptcy will generally appear on public registers and can affect future borrowing and professional reputation.
- Restructuring Options: Depending on the level of debt and your broader financial position, you may need to consider options such as:
- Negotiating time to pay or settlement
- An Individual Voluntary Arrangement (IVA)
- Ultimately, in some cases, bankruptcy
Early engagement with the lender and with professional advisers often produces better outcomes than waiting for enforcement to escalate.
How Our Personal Guarantee Solicitors Can Help
Whether you are:
- Being asked to sign a director’s personal guarantee
- Already facing demands or court proceedings under an existing guarantee
- Concerned about guarantees in the context of company insolvency
It is important to understand your position before taking action.
Our team can:
- Review your personal guarantee and loan or lease documentation
- Advise on your potential exposure and options, including negotiation, restructuring or challenge
- Explain how a guarantee interacts with the director’s duties and insolvency law
- Support you through discussions with lenders, insolvency practitioners and other stakeholders
For confidential advice tailored to your situation, contact our personal guarantee solicitors at info@witansolicitors.co.uk.
FAQ
Is it possible for a director to act as a personal guarantor?
Yes, directors frequently act as personal guarantors for company debts, such as loans, overdrafts, leases or trade credit. By doing so, they agree that if the company does not pay, the lender can seek payment from them personally.
Are guarantees by directors legally binding?
Guarantees by directors are generally legally binding if they meet the usual requirements of English contract law (such as offer, acceptance, consideration or execution as a deed, and intention to create legal relations) and any specific formalities for that type of agreement. Once signed, the director is normally obliged to comply with the guarantee, subject to any valid defences.
Will a personal guarantee affect my credit score?
A guarantee itself is not usually recorded on your credit score. However, if the guarantee is called and you do not pay, resulting in a court judgment or bankruptcy, that outcome will normally appear on your credit record and can make future borrowing more difficult.
Can I be released from a director’s personal guarantee?
Release from a guarantee normally requires the creditor’s consent and should be confirmed in writing. Possible routes include:
- Negotiating a release or substitution of guarantor
- Refinancing the underlying debt on new terms without a guarantee
- Repaying the debt in full
Simply resigning as a director does not automatically release you from the guarantee.
Is there any way to limit my liability under a personal guarantee?
Sometimes. You may be able to negotiate:
- A cap on the maximum amount guaranteed
- Limits to specific facilities rather than “all monies”
- Provisions for release once certain conditions are met (for example, after the loan balance falls below a threshold)
The scope and limits are commercially negotiable, but must be set out clearly in the guarantee document.
