Credit control top tips: Ask for a Personal Guarantee

This is the second in our series of credit control top tips. Click here to view the previous in the series.

Dealing and contracting with companies can be a minefield! In Top Tip 1, we discussed how important it is to know your client.

Once you have found out exactly who your client is, it is worth thinking about your options if, on checking, the credit rating of a company you are thinking of contracting with is not perfect. You probably will still want to deal with that customer but may want to think of other ways in which you can protect your business. One main way is to ask for money up-front but another option is to ask for a personal guarantee.

If you are a director of a limited company, you will likely have had to give a personal guarantee to your bank, or any hire purchase or debt finance company.

Therefore, if you are providing goods and services to limited companies, especially on a repeat basis, it may be worth considering whether or not to insist on your customer giving you a director's guarantee, especially where the company you are dealing with is relatively small or has not been incorporated for long enough to build up a good credit rating.

What does a Guarantee do?

A company has its own separate legal personality to that of its directors. It might seem strange, but some companies can operate with one person as its sole director. This means that if there is a dispute and that company that you have contracted with is a limited company, you will not, generally, be able to sue that director for breach of any contract or debt claim. If the company is insolvent or has no assets, it may be very difficult to recover anything. It may seem extremely unfair if the company you have contracted with to be wound up, only for the director to start up a new business later.

A personal guarantee from the director should mean that, if the company you have contracted with cannot fulfill its obligations, then the director who has given the guarantee will have promised to fulfill those obligations in the company's stead and so a guarantee will essentially ensure that that director is personally liable for any debt or obligation of the company.

Some top tips then when considering a Director's Personal Guarantees:

  • check that the director has sufficient assets to pay the company's debts by checking the director's assets and finances. A personal guarantee will only be any use if the director is able to pay the company's debts if the company cannot
  • consider asking for more than one personal guarantee where there is more than one director
  • consider updating the guarantee if the contract between the company and you changes or varies as this may discharge the guarantee
  • be very careful where a spouse who jointly owns property with the director. The director and his or her spouse should take independent legal advice separately to ensure they understand the effect of giving the guarantee
  • check what other guarantees the director has already provided to banks and other suppliers

Can we help?

We have experience of both enforcing personal guarantees against directors after a company has become insolvent (or has failed to pay its debts) and defending clients against which personal guarantees are being enforced.

Our experienced team would be happy to help with any queries which you may have and would be happy to discuss how we can help you avoid any potential pitfalls in asking for or signing director's personal guarantees. Please contact Bill Duncan if you have any queries.