As a company director, you are often asked to sign agreements on behalf of your company. These documents can seem routine, but without a careful review, you could find yourself personally liable for company debts. In this blog Ai Law explores a recent case where a director was found personally liable for company debts on a Screwfix trade account.
What is a Personal Guarantee
A personal guarantee is a commitment by an individual, usually a director or shareholder, to be personally responsible for the debts or obligations of their company. If the company defaults or becomes insolvent, the creditor can pursue the director’s personal assets to recover the unpaid debts. Personal guarantees from directors are becoming commonplace in conjunction with trade accounts.
In the case of Screwfix Direct Ltd T/A Trade UK v Mr James AKA Jamie Paterson [2024] SC HAM 1, we see how such a scenario can develop. Mr. Paterson, the director of a company called Paterson Restoration Limited, unwittingly found himself personally liable for his company’s debts due to a personal guarantee he had signed as part of a trade account card agreement. When his company was wound up in 2020, Screwfix sought to recover outstanding debts from him personally.
The key legal issue for the court to consider was whether a clause in the trade account card agreement constituted a personal guarantee by Mr Paterson. The clause stated:
“I, the director, agree to guarantee performance of all the company’s current and future financial obligations to Trade UK, including any subsequent increase/s in credit limit”.
The court ruled that the personal guarantee clause was sufficiently clear enough to bind Mr. Paterson as an individual, not just in his capacity as a director.
The court further emphasized that the clause made commercial sense only if it was construed as a personal guarantee: otherwise, it would serve no purpose, as Mr. Paterson was already authorised to bind the company in his capacity as a director.
This demonstrates how easily a director can find themselves in a precarious position, even if they believe they are signing solely in their capacity as a company officer.
The Consequences of a Personal Guarantee
Personal guarantees can expose directors to significant personal risks. If the company becomes insolvent, directors who have signed personal guarantees may find themselves personally liable for company debts. This could lead to:
- Financial risk: If your company cannot meet its obligations, creditors can pursue your personal assets—such as your home, savings, or other valuable possessions.
- Credit score impact: Personal guarantees can also harm your credit rating, making it more difficult to secure personal loans or credit in the future.
- Legal challenges: As in the case of Mr. Paterson, you may face legal action where the court could uphold the personal guarantee, leaving you personally responsible for paying back the company’s debts, and legal costs if unsuccessful.
How to Protect Yourself
To avoid falling into the trap of personal guarantees, directors should take the following precautions:
- Understand the terms before signing: Always read agreements thoroughly. Be cautious of clauses that might impose personal liability, even if they are not explicitly labelled as personal guarantees.
- Seek legal advice: Consult with a legal professional before signing any agreements that could potentially expose you to personal liability. They can help clarify the terms and implications of the contract.
- Negotiate terms: If a personal guarantee is required, consider negotiating the terms. You may be able to limit the guarantee to a specific amount or time period, or exclude personal assets such as your home.
- Consider alternative arrangements: In some cases, it may be possible to negotiate a bond, insurance, or corporate guarantee in place of a personal guarantee. These options can provide security for the creditor without putting your personal assets at risk.
- Keep records: If you sign an agreement that includes a personal guarantee, keep detailed records of all communications and documents related to the agreement. These records could be vital if you later need to dispute the terms or conditions of the guarantee.
Conclusion
Personal guarantees can have devastating consequences if you are not fully aware of what you are agreeing to. As a director, it’s crucial to approach every contract with caution and seek professional legal advice to avoid inadvertently exposing yourself to personal financial risk. By taking steps to protect yourself, you can minimise the risks and ensure that your personal assets remain safeguarded, even if your company faces financial difficulties.
Ai Law can review agreements before you enter into them to determine any liability or exposure, either for your company or you personally.