Personal Guarantees And Your Family Home
Most directors understand that a limited company limits their liability. Rather fewer have noticed that they have signed that protection away.
Personal guarantees are routine. Lenders ask for them on business loans, overdrafts, asset finance, commercial leases and supplier accounts, and they are often presented as a formality at the point where everybody wants the deal done. The document is signed and filed and nobody looks at it again.
What it actually says is that if the company does not pay, you will. And that promise outlives you.
The short answer
Signing a personal guarantee makes you personally liable for a company debt, which sets aside the main protection a limited company provides. The guarantee does not disappear if you die: the lender can generally pursue your estate, which may mean your family dealing with a business debt out of the house and savings they have just inherited.
What this changes
- You are personally liable for a company debt, despite the company being limited
- The guarantee generally survives your death and can be pursued against your estate
- Your family home and savings can be exposed, depending on what you signed
- Business failure and a personal claim can arrive at the same moment
- Guarantees often cover more than the original amount, including interest and costs
- Several directors may have each guaranteed the same debt in full rather than a share each
The bit people miss
The part people have not considered is what happens to the guarantee when they die. The instinct is that a personal obligation ends with the person. Generally it does not. The lender can look to the estate, which means the money that was meant to provide for a family can be applied to a business debt instead, and the house may be part of that. Worse, the circumstances are often connected: the death of a director is frequently what puts the company into difficulty, so the company stops paying at the same moment the guarantee is called in. That is the scenario worth insuring, and it is the one almost nobody has thought about.
Find Out What You Have Actually Signed
Almost nobody can list their guarantees from memory, which is the first thing worth fixing because the answers change what you need.
The questions are specific. How much is guaranteed, and is it capped at a figure or open-ended? Does it cover just the original loan or also interest, fees and costs? Is it limited to one facility or does it extend to anything the company owes that lender? And if there is more than one director, is each of you guaranteeing a share, or is each of you guaranteeing the whole thing, which is the common arrangement and the one people misunderstand.
That last point matters a great deal. Joint and several liability means a lender can pursue any one guarantor for the entire amount rather than for a fair share, so a director can be left personally liable for all of it regardless of what seemed fair at the time. You cannot size cover sensibly without knowing which of these applies to you.
Why Writing It In Trust Matters Here
The trust question comes up on most life cover and it is unusually important in this specific situation.
If a policy is not written in trust, the payout generally goes into your estate. If a lender is pursuing your estate under a guarantee, the money has arrived in exactly the place the lender is looking. The policy you bought to protect your family can end up settling the business debt, which may be the practical outcome you wanted, but it should be a choice rather than an accident.
Written in trust, the payout generally goes directly to the people you named and outside the estate. That allows the two problems to be dealt with separately and deliberately: cover sized for the guarantee, and cover sized for your family, each directed where you intend. Which arrangement suits depends on your circumstances, and it is worth going through properly because getting it the wrong way round defeats the purpose.
What usually fits, and why
Arranged to clear or cover the guaranteed amount so the lender is paid and your family keeps what you intended them to have. Usually written in trust so the payout is not caught up in the estate the lender may be pursuing.
A serious illness can stop you running the business, which can stop the company servicing the debt, which is when guarantees get called. The lump sum addresses that sequence rather than waiting for the worst version of it.
The company side of the same debt. Where the business insures its own borrowing, the loan may be repaid without the guarantee being called at all, which is a cleaner outcome.
Common questions
Does a personal guarantee end when I die?+
Generally no. The lender can usually pursue your estate for the guaranteed amount, which means it can be met out of the assets your family inherits, potentially including the house. The assumption that a personal obligation dies with the person is the single most common misunderstanding about guarantees.
But my company is limited. Does that not protect me?+
It does, except for anything you have personally guaranteed. A guarantee is specifically an agreement to set that protection aside for that debt. Limited liability still applies to everything else, which is why it is worth knowing exactly which debts you have guaranteed and which you have not.
There are three directors. Are we each liable for a third?+
Often not. Guarantees are commonly joint and several, which means the lender can pursue any one guarantor for the full amount rather than a proportion. You would then have to recover from the others yourself. Check the wording, because it changes how much cover you need quite dramatically.
How much cover do I need?+
Enough to deal with the guaranteed amount as it actually stands, which means checking whether the guarantee is capped, whether it includes interest and costs, and whether it extends beyond one facility. Once you have that figure we can tell you what cover for it costs.
Should the policy be in trust?+
Usually it is worth considering carefully here, because a payout that lands in your estate lands where a lender may be looking. Written in trust it generally goes to the people you named instead. Which arrangement is right depends on whether you want the cover to settle the guarantee or to protect your family, and those can be arranged separately.
Can I get a guarantee released?+
Sometimes, particularly if the company's position has improved or the facility has been repaid. Lenders do not always volunteer this and old guarantees can sit in place long after they were needed. It is worth asking, because a released guarantee is better than an insured one.
Cover that often goes with this
The gaps we most often find sitting next to this one.