In today’s commercial world, business owners and directors are frequently asked to provide personal guarantees on behalf of their companies, especially when suppliers extend credit or financiers provide funds. Understanding the risks of signing a guarantee and indemnity is essential to protect your personal assets.
What is a Guarantee?
A guarantee is a commitment by one party (usually the business owner or director, known as the guarantor) to fulfill the obligations of another party (typically the business or company, known as the principal) to a third party (such as a supplier or financier) if the principal fails to meet its obligations. This is a secondary obligation, meaning the guarantor’s liability depends on the principal’s liability being established. If the principal’s liability is discharged, so too is the guarantor’s.
Many guarantees now include indemnities, creating a combined guarantee and indemnity where the guarantor becomes primarily liable for the principal’s debts. This form means the guarantor effectively stands in the shoes of the principal if obligations go unmet.
Why Legal Advice is Critical
Because guarantee documents vary significantly, it’s essential to obtain legal advice before signing one—even if you’re familiar with them. A lawyer can explain the specific terms and help negotiate better terms, potentially limiting your liability or setting conditions for release from the guarantee.
Key elements to consider:
- Single or Continuing Guarantee: Some guarantees cover only one transaction, while others are “continuing guarantees” that extend to future obligations until formally discharged.
- Joint and Several Liability: Where multiple guarantors exist, the third party can pursue any one guarantor for the full obligation. This flexibility places additional risk on each guarantor.
- Fixed or Unlimited Amount: Some guarantees are for a specific amount; others may cover any and all amounts owed by the principal.
A solicitor can highlight these risks and, if possible, negotiate adjustments.
Exposure of Personal Assets
Even without formal security, such as a mortgage, your personal assets remain at risk if the principal defaults. In such a case, the third party may seek a court order to enforce payment, which could involve selling property or, in severe cases, filing a bankruptcy notice against you.
Acting as a guarantor also affects your ability to borrow, as lenders consider the guarantee a liability even if it hasn’t been called upon.
Steps to Minimise Risk
To mitigate these risks:
- Seek Legal Advice: Understand the specific nature and impact of the guarantee before signing.
- Consult with a Financial Advisor: Ensure you can meet any obligations and structure your assets to minimise exposure.
- Stay Informed: Regularly monitor the principal’s liabilities and seek release from your guarantee obligations as early as possible.
Key Guarantee and Indemnity Terms
Before signing, be sure you understand key terms, particularly those around defaults and release from liability. If the company defaults, you could be liable, regardless of your position as a director. Resigning may not automatically release you from obligations—ensure you address this directly.
How NB Commercial Law Can Help
The team at NB Commercial Law provides advice on loan agreements and guarantee documents, including independent legal advice certificates. We tailor our advice to your situation and the specific documents from your lender.
Contact NB Commercial Law to protect your interests before signing a guarantee and indemnity.