The facility is £80,000. The relationship manager has been helpful throughout, the rate is better than you expected, and at the end of the meeting she slides across a two-page document and says it is standard, everyone signs one. It is headed Guarantee and Indemnity. Your co-director signs his copy without reading it because you are both late for something.
Four years later the company fails owing £61,000 on that facility, and the bank writes to you personally, not to the company.
The guarantee is a separate contract from the loan
Limited liability protects your personal assets from the company's debts. A personal guarantee is you agreeing to step outside that protection for one specific creditor. It is its own contract, between you and the lender, and it does not disappear when the company does. That is the entire point of it.
Guarantees must be in writing and signed by the guarantor, a requirement that has survived from section 4 of the Statute of Frauds 1677. That is close to the only formality. There is no cooling-off period, no requirement that anyone explains it to you, and no cap unless one is written in.
Read the definition of what is guaranteed. An all-monies guarantee covers everything the company owes that lender, now and in future: the loan, the overdraft, the business credit card, the invoice finance facility, the charge on the equipment, and anything else they advance later without asking you again. Most bank guarantees are all-monies. Most guarantors think they are guaranteeing the one loan they were discussing that afternoon.
Then read whether it is a guarantee or a guarantee and indemnity. A guarantee is secondary: if the underlying debt is unenforceable, so is the guarantee. An indemnity is a primary obligation that stands on its own, so the lender can come to you even where the company's liability has been compromised. Most bank documents include both, which is why they are usually headed that way.
Joint and several means all of it, from whoever is easiest
Where two or more directors guarantee the same facility, the guarantee is almost always joint and several. That does not mean you each owe half. It means each of you owes the whole amount, and the lender can pursue whichever one of you looks most likely to pay.
In practice that is the director with a house, a pension and a job. If you pay the lot, you have a right of contribution against your co-guarantor, which is a claim you now have to bring yourself, against someone who has just watched his business fail and who may have nothing. The lender's problem became your problem, and then your problem became a second piece of litigation.
If the guarantee is to be secured by a charge over a jointly owned home, your spouse or partner has to sign too, and the lender will insist they take independent legal advice. That requirement comes out of the House of Lords decision in Royal Bank of Scotland v Etridge (No 2) in 2001, which set out what a lender must do to protect itself against a later claim of undue influence. The solicitor's certificate is there for the bank's benefit. It is also the only point in the process where somebody sits down and explains the document to the person signing it, so use the meeting properly.
What you can actually negotiate
A guarantee is a negotiation. Not always a successful one, but the first draft is never the only possible draft, and lenders expect to be asked. What is worth asking for:
- A cap. A fixed monetary limit, for example £40,000 rather than the whole facility, plus interest and costs. Lenders will often accept a cap on a well-secured facility, and a capped guarantee is a completely different risk from an unlimited one.
- A restriction to a named facility, so it does not roll forward onto everything the bank ever lends the company.
- A several rather than joint and several liability, split by shareholding. Rarely granted, always worth asking, and sometimes conceded in the form of a cap per director that adds up to the facility.
- Exhaustion of security first, so the lender realises its charge over the company's assets before coming to you. Standard forms usually say the opposite.
- A sunset, so the guarantee lapses on a date or when a covenant is met, rather than continuing indefinitely.
Also ask what would let you out of it later. Two years of accounts showing the company can service the debt on its own is a reasonable trigger, and some lenders will write a review into the facility letter. They will not offer.
Resigning as a director does not release you
This is the one that catches people. You sell your shares, you resign, Companies House shows you as terminated, and you assume the guarantee went with the role. It did not. The guarantee is between you and the lender, and only the lender can release you.
That release has to be in writing, and you have to ask for it as part of the exit deal, before you hand over the shares, while you still have something the other side wants. An indemnity from the incoming shareholder is a poor substitute, because it leaves you liable to the bank and dependent on someone else's solvency to make you whole.
The same applies when the debt is repaid. Paying off the loan does not automatically discharge an all-monies guarantee: the document usually continues in force for whatever the company borrows next. Write and ask for a deed of release, and keep it. Years later, when the company you sold in 2019 goes under, that letter is the whole conversation.
If you are already on the wrong side of a demand, take advice quickly rather than ignoring it. There are real defences in some cases, around material variation of the underlying facility without the guarantor's consent, around whether the document was properly executed, and around the lender's conduct. They are fact-specific and they get weaker the longer you wait.
Where this shows up in the game
Business Baron makes the guarantee the price of the money. Early on you have no trading record and no security, so the bank asks for one, and the decision is whether the growth is worth putting your own house behind. The bank manager is a named person with a memory, so a director who has guaranteed before and repaid gets asked for less next time. The consequences arrive in the same slow, letter-by-letter way they do in reality.