At Lane & Co we have had experience with our Clients coming to us informing us that they are quite happy that they have a Company Guarantee from the Debtor Company’s Holding Company or Sister Company guaranteeing all debts from the Debtor Company.

On paper that sounds great …… However

Getting a Personal Guarantee from your Clients Director / Directors instead of a Company Guarantee can make more sense for several reasons, especially when chasing unpaid debts:

1. Increased Likelihood of Payment

  • A Company Guarantee is only as strong as the financial health of the company providing it. If the company becomes insolvent, you may not recover your money from the Guarantor Company.
  • A Personal Guarantee holds an individual personally liable, meaning you can pursue their personal assets (e.g., savings, property, income) if the debt is unpaid, (however you must ensure that they do have personal assets and are worth the value of the Personal Guarantee!!)

2. Reducing the Risk of Limited Liability Protection

  • Companies, especially limited liability entities (e.g., LLPs, Ltds), are legally separate from their owners. If the company goes into liquidation or dissolves, a Company Guarantee may be worthless.
  • A Personal Guarantee bypasses this issue, allowing you to go after the individual even if the business fails.

3. Stronger Commitment from the Client

  • If a Director is personally liable, they are more likely to ensure the Company pays its debts to avoid personal financial consequences.
  • This can lead to more responsible behaviour in managing payments.

4. Enforceability

  • Personal Guarantees are often easier to enforce legally compared to Company Guarantees, as businesses can use legal loopholes (e.g., restructuring, insolvency) to avoid payment.
  • Courts may be more willing to grant enforcement against an individual with proven personal liability.

5. More Negotiation Leverage

  • The threat of personal liability may encourage the client to settle the debt faster rather than risk legal action against their personal assets.

When a Company Guarantee Might Still Be Useful

  • If the company is well-established, financially stable, and has substantial assets.
  • If the Company Guarantee includes collateral or security, reducing the risk of non-payment.
  • If pursuing an individual is not practical (e.g., Directors are outside your jurisdiction).

Would you like help drafting a Personal Guarantee Agreement or guidance on enforcing one At Lane & Co – we are here to help