A beginner’s guide to personal guarantees by directors

If you are looking to start trading with smaller or newer companies, then you could be worried about what may happen if they go bust before they have paid you.
Liability

If they are a limited company then, in most cases, the directors will not be held personally liable for the company’s debts. This is because the company and its directors are regarded as separate legal entities. This means that if the company were to go bust then all outstanding creditors are dealt with in the same way – and may or may not get paid what they are owed.

There are some exceptional circumstances where directors can be held personally liable for the company debts, but only when they can be proven guilty of ‘wrongful trading’.

What is a director guarantee?

A director guarantee is a legally binding pledge that the director in question accepts personal liability for their company’s debts and will pay these from personal funds should the company go bust. It is highly recommended that you make this part of your contract when you start a trading relationship with a newer or smaller limited company.

Most company directors will be prepared to offer a personal director guarantee as they would probably not be a director if they didn’t think the business was viable. If they are extremely resistant to doing so, then that in itself should be a warning sign.

Other uses for personal guarantees by directors

As well as being something that you should look for in a trading partner or supplier, providing your own personal director guarantee can give you access to business loans that you could not otherwise access. In these circumstances, you would be giving the guarantee to the lender, and accepting personal responsibility for the business’s debts.