Does a director guarantee end if the director leaves the company?

A director guarantee makes the director of a Limited Company personally liable for that business’s debts should it be unable to make its repayments.

Signing a director guarantee is considered to be a risky strategy as any failure of the business can result in the director having to bail out the business using their personal funds, occasionally resulting in their home being repossessed or them being declared bankrupt.

One of the riskiest things about a director guarantee is that it does not terminate when a director leaves the company.

How can you be released from a director guarantee?

A director can only be released if the creditor allows them to be. Usually, this is at the end of the agreement when the outstanding liabilities are repaid in full or, in some rare circumstances, when a replacement guarantor assumes their liability.

A director guarantee may be revoked if the director can provide substantiating evidence that they were misrepresented or under undue influence at the time of signing the director guarantee, or that they have been the victim of fraud. These scenarios are unlikely to occur as directors are obliged to seek Independent Legal Advice prior to signing a director guarantee and part of this process involves ensuring that the director understands the risk and is not being coerced.

What happens if multiple directors are signatories to a director guarantee?

A director guarantee usually renders all signatories jointly and severally liable for the debt, meaning that the lender can pursue any or all of the directors for repayment should the business default This is the case even if one or more signatories resign or retire before the debt is repaid in full.

Best practice for signing a director guarantee

If there is a likelihood that you will leave the company before the debt is repaid, you should seek the inclusion of a clause that severs your personal liability at the point you end your business association. This is only likely to be accepted if joint signatories agree to accept your share of the liability at this point.