Director guarantees can be a good option for a company to access financing they would otherwise not be able to obtain. A director guarantee is attractive for lenders that are considering lending to businesses when there is a higher risk they may default. It is also common for such guarantees to be signed by two or more directors to spread the risk.
What happens when a joint and several guarantee is triggered?
If a business defaults on its debts, the creditor can trigger the joint and several director guarantee. It can also be triggered when a business becomes insolvent or attempts to appoint administrators. As it is a personal guarantee, the directors who have signed the guarantee are, at this point, personally liable for the outstanding amount of the loan. All guarantors are liable for the full amount, as ‘jointly and severally’ means all parties are equally responsible. This does not mean that each will pay the full amount of the loan; instead, if one guarantor cannot or won’t pay, the lender will pursue the other guarantors for the full amount.
Is a joint and several loans a good idea?
In the current economy, company insolvencies are increasing; therefore, a director should think carefully about entering into any personal guarantees. It is advisable to seek legal advice from a reputable firm such as https://www.parachutelaw.co.uk/director-guarantee before entering into a director guarantee. This will ensure they are aware of the risks and their rights.
What if the worst happens?
If you have entered into a joint and several director guarantee and your company defaults on its debts, the lender will move to recover the debt, including obtaining a court judgement, orders charging land against your property, and even repossession orders.