Director refusing to act as guarantor

[minnehoma]

Looking for some advice please.

I am a director of a limited company which is financial difficulties and have asked the bank for a loan to help us through a sticky patch. Our accountant has advised against acting as a guarantor for any loans but our MD has organised a loan with our bank who are in fact asking for the directors to guarantors for it.

Can I simply refuse to act as a guarantor for the loan and if so would it have any impact on my position as a director and shareholder?

 

[kulture]

It is a personal choice. No-one can force you to be a guarantor. It is possible that a shareholders meeting may be persuaded to vote you off the board, in which case you will no longer be a director. No-one can take your shares away from you, although you might (unlikely) have some shareholder's agreement that means you have to sell your shares if you stop being a director. This is not usual.
It is likely that NO bank will give the company a load without all the directors providing personal guarantees. It is possible that the lack of a loan will result in the company having to close. In this case your shares are worth nothing and the directorship nothing.

 

[Mark T Jones]

As above; nobody can or should try to force you to provide a guarantee.

I’m sorry to say that statistically, unless there is a strong and clear recovery plan I place, that borrowing money is unlikely to save the business

It will doubtless be a cause of friction and might lead to you being voted off the board, but you will quite probably be better off in the long run

 

[Lisa Thomas]

The Company is insolvent so the Directors need to take insolvency advice, before allowing the Company to take on more debt.

 

[blueprinthub.co.uk]

Looking for some advice please.

I am a director of a limited company which is financial difficulties and have asked the bank for a loan to help us through a sticky patch. Our accountant has advised against acting as a guarantor for any loans but our MD has organised a loan with our bank who are in fact asking for the directors to guarantors for it.

Can I simply refuse to act as a guarantor for the loan and if so would it have any impact on my position as a director and shareholder?

The banks are not your friends, and as nice as the guy/girl that you talk to may be, they will NOT help your business through tough times.
In fact, they may even take advantage.

I'm being absolutely serious.

I would advise against using a bank.
Try other business finance providers that lend on better terms: no director guarentee, unsecured lending, whatever.

If your business is going through a tough time, make sure that taking on a loan really is the right decision.
Generally adding a fixed monthly fee to your outgoings is always best avoided, even more so if you're in trouble of some kind.

 

[Chris Ashdown]

Don't forget that PG 's like this leave the individual liable for the entire amount guaranteed if the others are unable to pay there share, something like jointly and individually responsible for the guarantee (forget the actual wording)

 

[Gordon - Commercial Finance]

I would advise against using a bank.
Try other business finance providers that lend on better terms: no director guarentee, unsecured lending, whatever.

Completely agree that using a bank is probably not the best idea, however I would say that even with other finance providers, on an unsecured basis it is highly likely that personal guarantees would be required. It is either going to be PGs or ridiculous rates (to reflect the risk), which won't help, and could just sink the business quicker.

Depending on what the cash is for, you could pursue some kind of secured lending, which is less likely to require a PG. If you can tell us more I will see if you have any options. If your business is insolvent though, its not the right course of action to take more debt as had been said above.

To your original question though - you can refuse to sign the PG, but then the business won't get the loan. It is likely then that you would be removed as a director if the MD has their heart set on the money...

 

[Lisa Thomas]

[QUOTE=" It is likely then that you would be removed as a director if the MD has their heart set on the money...[/QUOTE]

That might be the best thing to happen for OP if the Company is insolvent... It will stop the risk of future personal liability brought against them from any Insolvency Practitioner involved who finds there has been misconduct.

 

[Blaby Loyal]

Might be a bit late for that as misconduct in the context of the Company Directors Disqualification Act 1986 will cover all directors in the three years before Administration or [insolvent] Liquidation so they may be tarred with the same brush.

I agree entirely though that leaving now might make the brush smaller and the tar a little less sticky!

 

[Mr D]

From what some have experienced, being removed as a guarantor afterwards can be pretty hard to impossible.

 

[Socio South West]

. Our accountant has advised against acting as a guarantor for any loans but our MD has organised a loan with our bank who are in fact asking for the directors to guarantors for it.

The first thing I would suggest is that you find an accountant who is up to speed with current bank practices to give you some practical advice.
However good the financial situation of the company I think you would find it very hard to find a bank that would make a new loan without a Directors Guarentee in place, unless there was other equity beside the value of the company that would cover the loan in the event of default.

As others have suggested.... Is there a realistic prospect of a sustained recovery with this borrowing in place? You and your fellow directors need to take the rose tinted specs off and be brutally honest with yourselves, and make sure you aren't throwing good money after bad.

But meanwhile back at the ranch.... to answer your question.... if you are refuse to become a guarantor it sends heftily negative signals to your co-directors: You would be better to resign and sell your shareholding to the other directors and move on. It is hard to see them having any confidence in you.

 

[Noah]

The banks are not your friends, and as nice as the guy/girl that you talk to may be, they will NOT help your business through tough times.
In fact, they may even take advantage.

I'm being absolutely serious.

He is, you know.

Natwest and RBS's "Global Restructuring Group" - Under threat of foreclosure of loans, the banks seized control of customer assets cheaply from businesses they claimed were failing even though often they had not defaulted on any loan repayments.

 

[Paul Norman]

From what some have experienced, being removed as a guarantor afterwards can be pretty hard to impossible.

This is important.

If you become a guarantor, and later leave the company, your release from that guarantee is not certain. You cannot unilaterally release yourself from it, but would need the bank's consent - which they are not obliged to give, that that request could itself trigger a demand for repayment of any monies loaned.

If you become a guarantor, therefore, assume that at some point you will be required to pay up personally. If you cannot do this, do not sign. If you do not want to do this, do not sign.

Not signing, of course, will mean the company cannot get the loan. And is very likely to result in a parting of the ways.

 

[Lisa Thomas]

I agree - I once advised where a Director left a solvent Company and years later got a demand from the bank for £100k as the Company had become insolvent after he had left but he had not got himself taken off the PG at the time of leaving...!!

 

[Jeff-R]

If the director is voted off / asked to leave under such circumstances by not risking their home or other personal assets, surely this is grounds for unfair dismissal?

 

[Mr D]

If the director is voted off / asked to leave under such circumstances by not risking their home or other personal assets, surely this is grounds for unfair dismissal?

Unfair to whom?

 

[Gordon - Commercial Finance]

If the director is voted off / asked to leave under such circumstances by not risking their home or other personal assets, surely this is grounds for unfair dismissal?

Look at that from the company's point of view - not committed to the company, blocking attempts to move the company forward, preventing the company raising funds.

I'm not disagreeing with you, but I think both sides need consideration.

 

[obscure]

Don't forget that PG 's like this leave the individual liable for the entire amount guaranteed if the others are unable to pay there share, something like jointly and individually responsible for the guarantee (forget the actual wording)

Joint and Several Liability. So the OP wouldn't just be liable for their share of the loan. If the other directors in the group can't/wont pay the bank can pursue individuals (the OP) for the entire amount.

 

[Mr D]

Look at that from the company's point of view - not committed to the company, blocking attempts to move the company forward, preventing the company raising funds.

I'm not disagreeing with you, but I think both sides need consideration.

OP gives guarantee, its a big risk and keeps job. Until next time...
OP doesn't give guarantee the company cannot get the loan. Is the director acting in the best interests of the company? Open to question perhaps.
Is the loan in the best interests of the company? Too little information for us to know.

 

[Lisa Thomas]

I'm not sure how a Company could force someone to enter into a legally binding agreement that risks them becoming personally insolvent.

 

[Mark T Jones]

OP gives guarantee, its a big risk and keeps job. Until next time...
OP doesn't give guarantee the company cannot get the loan. Is the director acting in the best interests of the company? Open to question perhaps.
Is the loan in the best interests of the company? Too little information for us to know.

I'm pretty sure that declining to sign a PG could ever constitute not acting in the best interests of the company

 

[Mr D]

I'm pretty sure that declining to sign a PG could ever constitute not acting in the best interests of the company

Sorry its late. Not understanding.

 

[KateCB]

I'm not sure how a Company could force someone to enter into a legally binding agreement that risks them becoming personally insolvent.

They can't. BUT if the OP doesn't become a guarantor and the company doesn't get the loan because of it, guess who the other Directors will blame for the failure of the access to more funding/potential closure! They would vote him off the board, if they need a loan to keep going, could they afford to buy him out.....? Once a director, your personal solvency is intrinsically linked with that of the company and your obligations as a director, so its either fall with them or walk away I guess.

 

[Mr D]

They can't. BUT if the OP doesn't become a guarantor and the company doesn't get the loan because of it, guess who the other Directors will blame for the failure of the access to more funding/potential closure! They would vote him off the board, if they need a loan to keep going, could they afford to buy him out.....? Once a director, your personal solvency is intrinsically linked with that of the company and your obligations as a director, so its either fall with them or walk away I guess.

Would resigning be the answer in that case?
Removes the obstruction, removes him from future liability.

 

[UKSBD]

When a bank asks for a PG do all Directors have to sign or would the bank provide the loan based on just the other directors signing it?

 

[Mark T Jones]

When a bank asks for a PG do all Directors have to sign or would the bank provide the loan based on just the other directors signing it?

It would depend - mostly on the relative financial values of the guarantees - to a lesser degree on the reasons given