Could resignation of director/ guarantor fold company

[Crocus]

Hello all,

Read several similar posts but cannot find anything that answers my query so hope someone might be able to assist.

My question is- though a director can resign at any point, if they also remove their personal guarantee at a time that could potentially fold the company, is there any way of holding them accountable?

Director 1- MD- majority shareholder- £20K personal guarantee
Director 2- minor shareholder- no personal guarantees
Director 3- minor shareholder- £20K personal guarantee

(Company secretary and another member of staff hold remaining shares)

Director 3 became a director at a time of financial crisis, the bank required another guarantor and so they signed up to a personal guarantee. During the last 3 years they have voluntarily put monies of up to £20K when the cashflow required it before the bank called in the guarantee, currently they have <£10K loaned to the company.

There is no written directors loan agreement, no shareholder agreement other than if you leave you relinquish your shares.

With the agreement of the other directors Director3 had started to expand the existing company into a different area, but being unable to secure marketing commitment from Directors 1&2 this area has not grown. Director 3 now wishes to resign from the company and start up another company. There are clients that will have to follow them as the existing company cannot offer the service he provides- this will then impact on the existing company's turnover.

But if he resigns and takes his personal guarantee away surely the bank will want to reduce the overdraft in lieu of a guarantor. In our current financial situation (if just one of our expected income payments is late we cannot pay salaries) this would effectively finish the existing business unless someone provides additional guarantee- very unlikely.

I am aware he wishes to resign directorship to protect his future career (he has about 20 years more to go than the other directors). Therefore his desire to resign is a large alarm bell about the state of the organisation not just his desire to do something different.

Hope someone can advise, many thanks- I am HR so am concerned about jobs.

 

The director ccannot stictly speaking withdraw his guarantee until the overdraft comes up for renewal.

You are, however, completely ccorrect that if he makes contact with the bank withdrawing his support, it will cause alarm and might (within facility terms) trigger a review, which is unlikely to be positive. In any case they will withdraw any leniency they might be showing.

It is not in the Directors interest to do this, as he will very much be on the hook for his guarantee.

 

[Crocus]

Thanks fundingportal,

So to clarify as long as he does not withdraw the guarantee he could still resign as shareholder/ employee/ director (thus protecting his career) and start his other company.

As you say he will be on the hook but if he does withdraw the guarantee and the company suffers, can he be sued for compensation due to his actions when he was a director?

 

[GRDCredit]

The director ccannot stictly speaking withdraw his guarantee until the overdraft comes up for renewal.

.

Now that is interesting - are you sure?? I come at this frmo having worked a long time ago (20 years) for a High Street bank so by no means up to date. The guarantees that we took contained a clause stating what notice was required to cancel. Therefore, if this notice was 3 months then the guarantor would give notice today and he would not be liable for any future debt after 22 December

However, he would be liable for any existing debt. If the borrowing is on a loan account, then not a problem as he would remain liable for the reducing loan until it was paid

However, an overdraft by its very nature fluctuates. Any money paid in is seen to pay off the oldest debt, with any cheques etc going out creating a new debt. Quite quickly therefore the guarantor would find his liability cleared but with a new overdraft created

Quite often we see former directors on here who are being chased for guarantees many years after leaving company because they forgot to give notice on it.

If I was in his shoes I would be telling bank and at least that way he would know the extent of his liability

When you say can he be sued for his actions as director do you just mean withdrawing his guarantee? If so, then no!

All IMO

 

[DCart1803]

There wil be a termination provision in the Guarantee which will cover, as mentioned above, notice and the extent of the liability that the Guarantor has guaranteed at the point of termination.

If he resigns as a director and no longer wants any involvement in the company, then he should rightly be able to cap his liability under the Guarantee at that point. You would not have any recourse against him if the bank pulled your funding as a result.

 

[toddle2u]

With regards to your comments concerning the Director protecting his future career - if the Company is liquidated within 3 years from the date of his resignation he will still be required to complete a Directors Questionnaire for the IP and his actions will be looked at by the IP and it will be on his record as being a Director of a liquidated company. Even so I do not see how this can be damaging to his future career as this is fairly common nowdays

Given the seemingly precarious position of the company at the moment he hasn't got a lot to gain by resigning but he does have a lot to gain by withdrawing his PG which could ultimately push the company over

 

[Crocus]

Thanks all.

He has decided that he will resign as director and given 8 weeks notice that he will be notifying the bank of intention to withraw his personal guarantee.

This way he protects his career (something to do with a professional membership he holds) and doesn't immediately put us in the the sticky stuff.

Fingers crossed....