A personal guarantee is a document that a director signs to guarantee the debt incurred by the company. This means that should the company fail to pay that debt, that creditor can rightfully seek payment directly from the director.
Commonly, directors sign personal guarantees with suppliers when they enter into a credit agreements. Guarantees are often found in the terms and conditions but sometimes guarantees are found in a separate document. Guarantees usually form part of any finance facilities with banks and other financial institutions.
A company does not need to be in liquidation, or even insolvent, for a creditor to exercise their right to make a claim against the personal guarantee.
A personal guarantee is a separate third-party agreement between a director (the guarantor) and a creditor, where the guarantor agrees to pay company debts, usually in full, when they have not been paid. The validity of personal guarantees is not disrupted by the actions of liquidators or administrators. Generally, a creditor does not need to take any specific action to make a guarantor liable. However, a personal guarantee cannot be exercised while a company is under voluntary administration. Once that period ends, the guarantee can be exercised immediately.
If a guarantor pays a creditor in full, the guarantor has the right to ‘stand in the shoes of the creditor’ under a right of subrogation. This replaces the creditor with the guarantor and means the guarantor has the same rights against the company as the creditor. The creditor must have been paid in full for any right of subrogation to exist, as this right does not exist partially.