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What happens with a personal guarantee when a director resigns?

Posted by Todd Davison on Apr 29, 2021 11:04:52 AM

Being a company director can take its toll. A new survey showed that up to half of business leaders were susceptible to stress and exhaustion – even when their company was doing well. For some directors, boardroom burnout can force them to consider resigning from the business.

There are, of course, other reasons why you, as a company director, might want to resign – for instance relocation, retirement or simply wanting a fresh challenge. But if you’ve signed a personal guarantee, you should think twice before tendering your resignation.

Much depends on the shape you are leaving the company in and the strength of the boardroom without you. Let’s help explain what we mean by that.

Resignation procedure

There’s not a lot to stop you from resigning as a company director, if that’s what you’re sure you want to do. You simply need to inform your fellow directors and shareholders in writing, then notify Companies House via a TM01 form. Whoever else you inform of your decision – customer, suppliers, etc. – is your choice.

Once you’ve dotted the Is and crossed the Ts on your resignation, your director liabilities are over and you will not be held responsible for anything that occurs within the company after that date.

Limited liability protection

Limited companies are protected by limited liability. From a director’s perspective, it means that you are not personally responsible for any company debts.

This does not necessarily mean a clean break from the company’s affairs. Should the company need to declare insolvency at any time during the three years after you’ve left, your conduct as a director will be investigated by the insolvency service. It’s for this reason that directors can’t simply wash their hands of a company immediately before it becomes insolvent.

If the insolvency service was to find any evidence of malpractice during your time as director, you will be held accountable for the consequences.

Personal guarantees

A further complication to resigning is added if you have signed a personal guarantee against a company loan. If it is called in once you’ve left the business – due to it being unable to keep up with the loan repayments – you (and any other guarantors) will still be personally liable for the debt. Your personal assets will potentially be on the line.

Contrary to what some directors believe, resigning from a business will not invalidate a personal guarantee agreement.

So, if you’ve signed a personal guarantee, you might want to reconsider whether resignation is the right option. Giving up your role as a director means you will no longer have a say in how the company is run, and will be unable to access accounting/ financial information. You’re essentially left in the dark – while still being liable for the debt.

You can ask to be released from the personal guarantee upon your departure as director. However, the lender is likely to ask for someone else to act as a guarantor. It will also depend on whether the company has managed to keep up with repayments to date.

Personal guarantee insurance

When you sign a personal guarantee, it’s fair to say that resignation is probably the last thing on your mind. But you need to think about all the ‘what ifs’ when signing a legally binding agreement, and taking out personal guarantee insurance could prove such a smart move in this respect.

Typically, people must be actively involved in a business in order to be eligible for personal guarantee insurance. Yet, personal guarantees are often signed jointly and severally by a number of directors, meaning that we may be able to insure the personal guarantee across all signatories. 

In doing so, this will support the resigning director because, whilst they relinquish day to day control of the business, they can rest assured that the personal guarantee across all directors (including them) is covered by the insurance. 

For more information on what personal guarantee insurance entails, speak to one of Purbeck’s specialists

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