In order to obtain commercial lending many directors and/or shareholders have to give the lender a personal guarantee – a promise that if the business does not pay the lender back that the guarantor will. Personal guarantees also form part of many equipment hire purchase agreements and commercial vehicle lease agreements.
The problem is they get signed and then forgotten about. Many guarantees to commercial lenders are known as all money continuing guarantees – this means that they are not linked to a specific loan, but cover any money borrowed from that lender at any time.
Most guarantees also provide that the Lender does not need to tell the guarantor about the company’s borrowing. This is not normally a problem because the guarantor would know by virtue of their role as a director. If however, the director is no longer a director then if they have given a personal guarantee they are on the hook for liabilities they may know nothing about – and that’s not an excuse to get out of paying if the Company defaults.
If you have given personal guarantees it is important to get released from them or if the guarantee allows you to, serve notice to limit your liability as soon as the lending has been repaid.
If you are retiring from a business then you want to be released from the guarantee or at the very least have an indemnity from the remaining directors/shareholders. The latter is not fool proof as you would still remain primarily liable to the Lender and any money you received under the indemnity you may have to hold on trust for the Lender, but at least it would be a small measure of protection.