Not a Guarantee

I am constantly surprised at the number of company directors that have no idea how many personal guarantees they have given on behalf of their companies, or to which suppliers they have been given.

At its most basic level, a guarantee is a promise to pay or be liable for the debts of another.  Today, most financiers and other providers of commercial credit (such as landlords and trade suppliers on terms) require that directors of small proprietary limited companies as a condition of advancing credit.  This is used to protect them against company insolvency.

Given that one of the primary reasons that businesses choose to incorporate is to take advantage of "limited liability" (ie the "Ltd" part of the company's name), providing personal guarantees effectively surrenders this advantage and opens up the asset base of the director to a company creditor.

However, what really does my head in is the number of directors that have no idea who they have made this sort of promise to.  In the event of a company insolvency (which is the point that the guarantee is going to be relied upon by a creditor), it is almost impossible to structure some protection for directors if they do not know who they have personally promised to pay.

I have seen otherwise prudent directors become bankrupt from such an oversight.

Ideally, directors should avoid giving personal guarantees at all.  In the real world, however, you can at least mitigate the risk by keeping good records of who you have given guarantees to and constantly monitoring the trading activity with these entities.

Depending on your trading record and your bargaining position, it is also possible to request that previously given guarantees be returned.