Directors' personal guarantees

Since the landmark case of Salomon v Salomon in 1897, it has been clear that a company has separate legal personality and is responsible for its own debts. Neither its directors nor its shareholders can generally be called on, even if the company is in default.

However, for smaller, owner-managed companies this often means that banks, landlords and even suppliers may agree to deal with the company only if its obligations are backed up by a personal guarantee from the individuals standing behind it.

Directors can be put under considerable pressure to give personal guarantees to get their company's business up and running and it is easy to be over-optimistic about the company's prospects. But a guarantee will put the director's personal assets at risk and should not be given without a full understanding of the implications.

The effect of a guarantee

By giving a guarantee, the director promises that the company will fulfil its obligations, for example to repay a loan or to pay rent, and that he will do so if the company does not. A guarantee is a secondary liability, which may be discharged if the company's obligation is varied or set aside, but it will usually also include an indemnity which would continue to apply in these circumstances.

If a claim is made under the guarantee, the director will be liable to pay the company's debt and, if he does not do so, the bank (or other beneficiary of the guarantee) will be able to take him to court and ultimately enforce a judgment debt against his assets, including the family home.

If the director does not have sufficient assets to cover the debt, he may be made bankrupt. In addition to the effect on his credit rating and the difficulty of obtaining financial services, insurance and so on, an undischarged bankrupt may not act as company director without leave of the court.

If several directors give a personal guarantee (or give a single guarantee jointly and severally) to the same bank, it does not have to take action against all of them but can claim the whole amount from one guarantor.

Secured guarantees and third party charges

In many cases, the bank will also want to take security over the director's assets. This would enable the bank to sell the relevant asset to meet any liability under the guarantee, without needing to go to court.

In the case of the family home, the bank would require the director's spouse or partner to join in giving the security if they co-own the property. In addition to...