Personal guarantees by shareholders: what is signed and what can be narrowed
A personal guarantee is the voluntary surrender of the separation between the company pocket and its owners. This guide covers what sets its scope, why it does not end when you leave the company, and what to check before signing.
“A guarantee capped at a sum and an unlimited guarantee are two entirely different documents.”
Adv. Erez Sapir
What is actually signed with a personal guarantee
A limited company exists to separate the company's pocket from its owners' pockets. A personal guarantee is the voluntary surrender of that separation, in favour of a particular creditor and to a particular extent.
The guarantor is not liable by virtue of being a shareholder. The liability arises from an independent undertaking taken on personally, which is why the protection of separate legal personality does not apply at all. That is the substantive difference between a personal guarantee and piercing the corporate veil: piercing is an exceptional remedy the court applies, while a guarantee is a contract signed in advance.
The question, therefore, is not whether the guarantor can be pursued, but exactly what the document they signed says.
Where it turns up in practice
A personal guarantee is not a document people go looking for. It appears as a condition, usually at the moment the other side holds the bargaining advantage.
- Banks, as a condition for opening an account for a new company or for a credit facility
- Suppliers, as a condition for credit or for volume of supply
- Landlords, as a condition for a commercial lease
- Leasing and finance companies, alongside the charge over the asset itself
In each of these the guarantee is signed at the point where the business needs something, and it is therefore examined less closely than it deserves.
Three questions that set the scope
Two guarantees can look identical and behave quite differently. The difference sits in three places:
- Whether the guarantee is capped. An uncapped guarantee covers the debt as it develops, not the amount outstanding when it was signed.
- Whether it is limited in time or to a transaction. A continuing guarantee keeps applying to future debts, including ones created long after signature.
- What happens where there are several guarantors. A joint and several guarantee lets the creditor recover the whole debt from one guarantor, leaving that guarantor to settle with the others.
The third surprises many guarantors. Someone who signed alongside three partners is not necessarily guaranteeing a quarter of the debt.
After leaving the company
The most expensive mistake in this area is the assumption that the guarantee ends on leaving the business. Selling shares, resigning from the board or withdrawing from a partnership do not cancel a document signed with a third party.
The guarantee is a contract between the guarantor and the creditor. The creditor is not a party to the exit agreement and is not bound by it. Cancelling or narrowing a guarantee requires an approach to the creditor and their written consent.
In any exit from a company, therefore, locating open guarantees and dealing with them is part of the transaction rather than an appendix to it.
What recovery from a guarantor looks like
From the creditor's side, a personal guarantee is the short route. No exceptional remedy is needed and no special circumstances have to be proved, only that the debt was not paid and that the document covers it.
Where the debtor company enters insolvency proceedings the point sharpens. A creditor holding a guarantee is not necessarily dependent on the order of payment and the collective distribution in the estate, and can approach the guarantor in parallel.
That is why a personal guarantee is regarded as strong security, and for exactly the same reason it is dangerous for whoever signed it.
What to check before signing
In most cases refusing a guarantee and still obtaining the credit is not an option, but narrowing it almost always is. The points examined in advance are a maximum amount, a time limit, a link to a specific transaction rather than an open account, and clarity on how several guarantors relate to one another.
If you have been asked to sign a personal guarantee, or you are looking to be released from one signed in the past, we would be glad to review the wording and say what its real scope is and what can be changed.
Questions and answers on personal guarantees
I sold my shares and left the company. Is the guarantee cancelled?
Four partners signed. Am I guaranteeing a quarter of the debt?
What is the difference between a personal guarantee and piercing the corporate veil?
The company entered insolvency proceedings. What happens to the guarantee?
Can a guarantee I am being asked to sign be narrowed?
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We will review the wording, say what its real scope is and what can be narrowed or cancelled.