Can a director resign from a personal guarantee?
When starting up a business, some directors will take on a personal guarantee in order to access finance. But can they resign from a directors personal guarantee once it’s been taken out? Here’s what you need to know.
What is a directors personal guarantee?
When directors of a business are looking to access finance, without having equity or assets in that business, they may offer a directors personal guarantee as a means of security to the lender. This means that if the business defaults on its loans, the lenders can seek financial redress from the director or directors, up to the value of the guarantees that were given at the time of the contract. As such, this is usually a mode of security offered when businesses are new and do not have equity in their own right.
Can you resign from a directors personal guarantee?
When a director leaves a business or ends their directorship, the directors personal guarantee doesn’t automatically dissolve. Rather, the directors personal guarantee can only be cancelled with express written permission from the lender or an adjustment to the underlying contract itself.
This is an important point for directors to realise when they are considering options for finance and loans for their business. This type of personal indemnity does leave the individual personally liable for the debts of the business and it means that the lender can come after their personal assets, including their house, if the business fails.
For that reason, it is very important to understand the features of these guarantees before taking one on. Directors guarantee insurance may be an option, and a lawyer can provide advice on whether the option being offered is a good one, within the risk and reward appetite of both the individual and the business.