A Guide to Directors’ Personal Guarantees

A personal guarantee means you agreed to pay the company’s debt from your own money if the company cannot.

It is the most direct way a director of a limited company ends up personally liable after insolvency, because it is a promise made in your own name rather than the company’s.

A guarantee is often signed years before it matters, as one condition among many of a bank loan, a commercial lease or a trade credit account, so its terms can be hazy by the time anyone relies on them.

When the company enters liquidation, the creditor claims in the liquidation for what the company owes and then turns to you for the shortfall, up to any limit written into your guarantee.

A guarantee you have forgotten about can still be enforced, and a secured one can put your home at risk. So the first step is to find the document and check three things: the amount or cap, whether it is secured on your home, and who it is owed to. Those three facts decide most of what follows.

Quick Answer: How Directors’ Personal Guarantees Work

In short, the guarantee stands apart from the company’s own obligation, and how the creditor can enforce it depends mainly on whether it is secured on your property.

Limited liability protects you from the company’s debts, but a guarantee is your debt: you created it when you signed. So the guarantee survives the company’s liquidation and dissolution, and a company voluntary arrangement or administration does not normally release it either unless its terms say so.

If the guarantee is secured against your property (a charge registered at the Land Registry), the creditor can enforce that charge directly, usually by seeking possession and selling the property, without first getting a judgment against you. You can check whether there is a charge on your home by downloading its title register from HM Land Registry for a small fee.

If it is unsecured, the creditor can obtain a county court judgment and enforce it through enforcement agents (bailiffs) or an order taking deductions from your wages.

They do not have to start there. Where the guarantee debt is undisputed and is £5,000 or more, they can serve a statutory demand, a formal written demand for payment, and, if it is still unpaid after 21 days and has not been set aside, petition for your bankruptcy without ever getting a judgment.

When Directors’ Personal Guarantees Are Required

Lenders and landlords usually ask for a guarantee in one of four situations:

• Bank loans and overdrafts. Banks commonly ask for a director guarantee on lending to a small company. The bank lends to the company but wants recourse to the director if the company fails. The guarantee may be limited (capped at a percentage of the facility) or unlimited (you guarantee the full amount).
• Commercial leases. Landlords of commercial property frequently require a director guarantee for the full term of the lease. If the company enters liquidation and the lease has years remaining, the landlord can keep claiming the rent from you personally as it falls due, even if the liquidator disclaims (formally gives up) the lease, until the lease ends or the landlord takes the premises back.
• Trade credit. Suppliers who extend credit to small companies sometimes require a director guarantee, particularly if the company is new or has a limited trading history.
• CBILS and government-backed loans. During COVID, Bounce Back Loans were government-guaranteed with no personal guarantee required. But CBILS loans above £250,000 could include personal guarantees. Check the paperwork rather than assuming a government-backed loan carried no guarantee.

What Happens to Directors’ Personal Guarantees in Liquidation

When the company enters company liquidation, the guarantee does not end. The creditor submits a claim in the liquidation for the full debt. Whatever dividend the liquidation produces reduces the amount owed under the guarantee (the creditor cannot recover more than the total debt).

The shortfall, the gap between what the liquidation pays and the total debt, falls on you, up to any cap in your guarantee.

Do not assume the liquidation will pay enough to clear the guarantee. Unsecured creditors can receive only a small fraction of what they are owed. If you guaranteed a £100,000 facility and the liquidation pays 3p, the creditor recovers £3,000 from the liquidation and comes to you for the remaining £97,000.

The timing of the claim varies. Some creditors call in guarantees immediately when the company enters insolvency. Others wait until the liquidation has concluded and the dividend is known. We advise directors not to wait for the claim. Contact the creditor proactively and begin negotiation before they send the demand letter.

Can You Negotiate a Personal Guarantee Down?

Often, yes, because a lender chasing a guarantee is weighing what it can realistically recover against what it will cost to get there. Your position is strongest when you engage early, show your finances honestly and make a credible offer.

Creditors accept reduced settlements for three reasons: (1) enforcing a guarantee through the courts costs money and takes time, (2) if the director has limited assets, enforcing in full may not recover significantly more than a negotiated settlement, and (3) making the director bankrupt may yield less than a voluntary payment because bankruptcy costs reduce the available estate.

A lender is more likely to consider a reduced settlement where you give full financial disclosure and make a lump-sum offer. It is likely to refuse a discount if it believes you hold assets you have not disclosed. No settlement figure can be promised.

Hiding assets is the quickest way to lose a settlement. A lender can search the Land Registry, and if it petitions for your bankruptcy a trustee will investigate your affairs, so an undisclosed asset tends to surface and the deal falls apart when it does.

Can a Personal Guarantee Be Challenged or Set Aside?

In limited circumstances:

• Undue influence. If you were pressured into signing the guarantee by someone in a position of power (a co-director, a spouse, the bank), it may be voidable. You need evidence, and the argument is harder where the lender made sure you had independent legal advice before signing.
• Misrepresentation. If the creditor misled you about the terms, the extent of the guarantee, or material facts about the transaction, the guarantee may be challengeable.
• Material variation. If the creditor significantly changed the underlying facility (increased the loan, extended the term, changed the borrower) without your consent, the guarantee may be discharged. Whether it applies depends on the guarantee wording and whether you consented.
• Procedural defect. If the guarantee was not properly executed (not signed as a deed when required, not witnessed), it may be unenforceable. Our guide on unenforceable personal guarantees covers the technical grounds.

We advise directors to have any potential defence assessed by a solicitor before conceding the guarantee. If there is a genuine defence, it strengthens your negotiating position even if you ultimately settle.

How to Protect Yourself from Personal Guarantee Exposure

1. Audit your guarantee position now. Pull out every loan agreement, lease, and credit facility. Check the guarantee clauses. Know what you guaranteed, to whom, for how much, and whether it is secured against your property.
2. Negotiate guarantees down at the point of signing. Ask for a cap, a time limit, or a limit that reduces as the loan is repaid. A lender may refuse, but you lose nothing by asking before you sign, and you have no leverage to ask afterwards.
3. Consider personal guarantee insurance. This insurance covers part of the guarantee exposure for a premium. It is not cheap, but for large facilities it can be worth the cost.
4. If the company is approaching insolvency, engage with guarantee creditors early. The earlier you negotiate, the more options you have. Waiting until the demand letter arrives puts you on the back foot.
5. Take personal legal advice. A solicitor specialising in director personal liability for company debts can assess your guarantee exposure, identify potential defences, and negotiate on your behalf.

Company Debt’s licensed insolvency practitioners advise directors, working alongside personal liability specialists where needed. A confidential consultation will map your guarantee exposure and explain your options.

FAQs on Directors’ Personal Guarantees

Related Guides

• Are Directors Personally Liable for Company Debts?: every route to personal liability, not just guarantees.
• Unenforceable Personal Guarantees: the technical grounds for challenging one.
• Personal Guarantee Insurance: what it covers and what it costs.
• Personal Liability for CBILS Loans: the guarantee rules on government-backed lending.
• Can Personal Assets of Directors Be Seized?: when a claim can reach your home and savings.
• Can a Director Be Made Bankrupt if a Business Fails?: how an unpaid guarantee can lead to bankruptcy.