One of the biggest attractions for directors who are also the sole owners of a limited company is the notion that if things do not work out and the business fails their liability will be limited to their personal investment.

However, as a company director you may be asked to provide a personal guarantee. A personal guarantee is an agreement between a limited company director and a lender, stating that the individual who signs is responsible for paying back a loan should the business ever be unable to make payments. It could be for supplies, to obtain business borrowing or even in relation to the lease of premises. Depending on when you enter into it you may not pay much attention to it and assume that it will never be called upon.

Often, we deal with directors who have seen their company go through financial difficulties and make sacrifices as they try to keep the company afloat. Salaries might be sacrificed, or savings spent to get over the latest slump. As a result there is extra stress, which may spill into relationship difficulties only then to ultimately find that the company cannot avoid going into liquidation. It at this point that a personal guarantee can then come to the surface.

You also need to be aware that in situations where more than one person gives the personal guarantee the liability is usually joint and several. The creditor can choose who to pursue and they may well not treat the individuals equally, preferring instead to target the one with the assets or higher income.

The holder of the personal guarantee may offer to take a low monthly payment on condition that the director provides them with a voluntary charge over their home. If granted then the unsecured loan that the company was given becomes secured on the home. A director who may have no income may well find the offer of breathing space in exchange for a voluntary charge attractive, but the terms need to be considered and legal advice should always be sought.

From a practical point of view when faced with a request to give a voluntary charge it is important to engage with the lender and not ignore them. Ask for time to take legal advice before agreeing terms and to review the personal guarantee. If you do not have a copy of the personal guarantee ask the lender for a copy.

A solicitor can review the personal guarantee and investigate whether it is enforceable or not. Typically, this will involve looking into whether you were misled in giving the guarantee, was there fraud, duress or misrepresentation that affected your decision? What information were you provided with at the time? Was the document executed correctly? Has the lending facility changed significantly in the period between the guarantee being given and the time of the claim?

Before any challenge can be made supporting evidence will need to be carefully considered and litigation can be expensive, and the outcome not guaranteed. It may also be possible for a negotiated settlement to be agreed as lenders will often consider accepting a reduced one-off payment in lieu of the full amount being paid over a period time.

For the individual having lost their business and income having the personal guarantee called upon can be the last straw financially and a personal insolvency procedure may need to be considered.

Cognitive Law have experience in assisting directors with the issues outlined above who can give advice on matters relating to director’s liabilities, should you wish to discuss any issues arising from the above please contact me on

The above is not intended to be regarded as advice or to be a comprehensive guide to the claims referred to, if faced with such claims advice should be sought.