As the period of economic uncertainty continues, a Midland dispute resolution lawyer is warning company directors of the dangers of giving personal guarantees on company loans or lease agreements.

Neil Williams, partner and head of dispute resolution and litigation at Black Country law firm George Green, says that acting as a guarantor for any type of commercial loan or lease agreement can leave a director liable for repayment for a potentially unlimited time period, even if his association with the company for which he provided the guarantee has come to an end.

“We have seen a sudden increase in the number of cases where we are advising directors who are being pursued for repayment of loans or overdrafts by banks, or for continued payment of rent on commercial property leases by landlords, having provided a personal guarantee,” says Mr Williams, who is based in Green’s Cradley Heath offices.

“It was tempting, particularly in the easier economic climate before the credit crunch started to bite, to give a personal guarantee against the provision of some form of finance for company expansion, or new premises.

“It was simply a signature on a piece of paper, with the belief that the business would continue to prosper and the lender would never demand their money back.

“However, as more businesses start to struggle and default on loan repayments, lenders are increasingly looking to recover their money from guarantors.”

According to Mr Williams, some of the cases he is acting on concern people who are no longer associated with the defaulting businesses.

“Many people who give personal guarantees forget, or are not correctly advised in the first place, that they are actually a separate contract, totally divorced from the loan, mortgage, rent, or hire agreement, they may be guaranteeing.

“This means that unless they have specifically sought and been granted a release from this contract, that their liabilities under the guarantee may continue, even if they have sold the company or a property lease has been assigned, leading to potentially disastrous financial consequences.

“We are aware of one case, where in his eagerness to sell his business, a director did not get the landlord to release him from a rental guarantee at the time of the sale.

‘‘The company to which he sold his business went into receivership and he was left facing a claim from the landlord for unpaid rent and other obligations, which amounted to more than he received from the original company sale.”

According to Mr Williams, any directors who believe they may have ever provided personal guarantees should carry out an immediate audit.

“It is important to know the extent of any personal liabilities and their potential impact. If the association between company and its guarantor is over, it may be possible to negotiate an end to this, if the agreement was not dissolved at the time of exit.

“However, lenders may be extremely reluctant to consider such a move, especially in the current economic environment.

It may also be possible to be indemnified against a future claim, but in both cases, legal advice should be sought beforehand.”

According to Mr Williams, legal advice is also essential for any guarantor which lenders have already started to pursue. He says: “Banks and landlords can be negotiated with in these circumstances.

‘‘Having a legal adviser on board can help remove some pressure from the guarantor, providing him with some options, and the banks actually prefer dealing with a solicitor.”

Businesses which rely on personal guarantees to back up bank loans should also be aware of the effect of changing economic circumstances on their guarantors.

“If a guarantor is no longer in a position to pay back a loan or overdraft, then the lender may choose to demand its cash back from the company immediately.

“We are aware of one case where a bank demanded repayment of a £500,000 loan, judging that its guarantor would no longer be able to repay the loan if required, having just lost money on what was actually a completely separate business venture.

“If all else fails, then try to ensure as a last resort that the personal guarantee involved ends along with the association with the company,” Mr Williams said.