Personal guarantee is always a liability

A personal director's guarantee may increase your suppliers' credit line, but it could leave you in trouble, explains Eddie Pacey

In days gone by, the offer of a personal director’s guarantee was viewed with great respect and carried considerable weight and substance. These generally reflected the needs of a limited liability business to increase either its borrowing capacity with the bank or to facilitate an increased supplier credit line.

It was easy for banks to consider personal guarantees, as banks generally had great insight into the personal affairs of directors, who frequently used the same bank or branch to manage their personal affairs. The number of local branches has diminished, and central banking facilities have filled the void. Local bank managers, who knew everything there was to know about their clients – private or otherwise, are fast disappearing. Banks themselves have, as a result, found they had to work just a little harder to determine the value of personal security against business debt.

The nature and value of assets held has become more relevant, and banks more inclined to add cautions or charges to assets held – traditionally bricks and mortar, but also other personal assets.

Giving a bank or a trade supplier a guarantee jointly or severally is no minor consideration, and needs to be weighed up very carefully by both provider and recipient. Some may feel they may never be called upon and others fail to recall guarantees provided, not realising that resignation as director does not necessarily render the guarantee invalid, nor that increased supplier credit lines automatically increase potential liability under guarantees provided.

Some directors who provided trade suppliers with personal guarantees feel that the availability of credit insurance negates the need to call upon guarantees. This is by no means the case, as credit insurance is irrelevant, and insurers will insist on pursuing all security held before paying out. There have been cases where directors have questioned their liability when their business has moved into some form of insolvency process, assuming liability no longer ap plies.

The wording of most trade supplier guarantees is tight and strong, covering almost every eventuality. They are upheld in contested cases in both lower and higher Courts.

The changes in the Enterprise Act – in particular those relating to bankruptcy – have had an impact on the effectiveness of personal guarantees. The demand placed on guarantors in future is likely to be tougher from a trade supplier standpoint.

Quite frankly, the odds of a trade supplier accepting personal guarantees in respect of a debt in excess of £50,000 without first checking the value of assets held or obtaining some form of caution on property owned by the guarantor are now slim. Historically, faced with a demand to settle debts in excess of £100,000, the option of an individual voluntary arrangement, or of bankruptcy itself, became an easy avoidance route out of guarantee liability.

Anyone now seeking to offer personal guarantees must acknowledge they will have to provide more information and additional asset security; they must also be under no illusion that such guarantees will not be called upon. They are still useful for obtaining additional funding but their extent, limitation and liability needs to be addressed at regular intervals if they are to remain effective, controlled and less onerous.