Why use a director’s guarantee?

Many business owners will form a Limited Company to achieve tax efficiencies and for credibility within their customer base. Being the Director of a Limited Company gives individuals greater professional status and can improve their ability to access business loans, credit agreements and favourable trading terms.

 

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For the businesses that engage with them, however, there is a fundamental risk to be aware of. The Director of a Limited Company has a minimised personal liability. This means that if the business defaults on payments, is unable to repay its debts or goes into liquidation, you may be unable to pursue the business for repayment of outstanding debts or to apply legal recourse – unless you are in possession of a signed Director Guarantee.

What is a Director Guarantee?

A Director Guarantee makes the Director of a Limited Company personally liable for their company’s debts. Should the company be unable to fulfil its financial obligations, its suppliers and lenders may take legal action to recover the outstanding amounts from the Director’s personal wealth and assets.

How to get a Director Guarantee

Having a Company Director sign a Director Guarantee prior to making a financial commitment is a very effective way of setting the boundaries in a professional relationship. To be legally enforceable, it is essential that independent legal advice is sought from a company such as www.parachutelaw.co.uk/director-guarantee who will ensure that the Director understands their responsibilities and liabilities prior to entering into the agreement.

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In conclusion, entering into a business relationship in which large sums of money will change hands involves establishing trust. For many businesses whose own viability depends on the prompt payment of invoices or repayment of loans, a Director Guarantee can be a very effective method of ensuring that their payments are prioritised.

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