Posted: Wednesday, 2 March 2016 @ 11:01
It is quite often the case that trade suppliers will require personal guarantees before they will open a credit account and trade with an organisation. An unsuspecting employee may sign off the contract without realising they have signed a personal guarantee with personal implications for them which could be ruinous.
Personal guarantees will not be necessary from an individual/sole trader who is involved, or where the organisation is a partnership where the signature of one partner binds all partners. This is because it will be a contract with them as individuals or as a partnership and they are personally liable anyway.
So we are mostly talking about personal guarantees for the performance by limited companies of contracts they have entered into. But there are other circumstances where a non director will be asked to provide a personal guarantee, such as where the creditor is looking for some addition third party guarantees.
The most common form of personal guarantee is one given to a bank to underwrite a limited company's debt to the bank. This is usually given by a director who otherwise would not have any personal liability for the company's debt, but a shareholder may be asked to provide the guarantee. Another example of where a personal guarantees is given by someone for the performance by others of an obligation is one given to a landlord to guarantee the performance by the tenant in matters such as payment of rent and other obligations under a lease.
But quite often I have come across a personal guarantee given by an employee, someone who is not a director of the limited company. Sometimes an administrator or contract manager or accounts employee may have signed off (with the authority of a director) the trade creditors' contract which contains a personal guarantee in the small print, without realising the implications until it is too late. Once the signature is on the document it will be difficult to escape from the legal obligations. They may escape if they have been misled, but a court will first of all look at the signed document. Yes if they have to pay up they will have a right to claim against the company employing them, but that will be of little comfort if it has gone down the pan.
In every case I strongly advise that whoever is being asked to provide a personal guarantee should obtain prior independent legal advice. But first of all read the full terms of the contract very carefully. The bottom line is that an employee who is not a Director of the limited company and not a major shareholder should never give a personal guarantee.
Business and Litigation Solicitor
Tel: 01285 847001
Blog by Nigel Musgrove
Nigel has been providing dispute resolution advice as a solicitor for over 35 years. As well as advising SMEs and business owners on disputes he also offers a specialist licensing law service. View profile
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