Piercing the Corporate Veil

When dealing with the restructuring or insolvency of a company we often ask the directors what impact this could have on them personally. This could range from issues regarding directors’ responsibilities to the company and creditors through to loss of employment and income. One recurring problem is personal guarantees provided against company liabilities by present or former directors.

Unfortunately it is not uncommon for a director to not have a precise knowledge of guarantees provided on the Company’s behalf. There could be a number of reasons for this especially if the guarantee was provided some time ago. It is therefore advisable for directors to keep guarantees in a safe place and to consider keeping a list of guarantees provided together with some detail regarding the amount guaranteed, the date, to whom the guarantee was provided and whether it was open ended in time and quantum.

It is routine and has been for some time for banks and landlords to request that directors stand behind the company in case of default and failure. It appears that the guarantee is accepted at face value and signed as part of the suite of documents at a time of frantic activity such as relocating the business or purchasing assets. It is very easy for directors to get side tracked by other events.

Most banks will recommend that the director takes independent legal advice prior to signing the guarantee. This should act as an opportunity to take a breath and consider the implications for them personally if the company defaults on its obligations. The guarantee can be viewed by lenders as a method of binding the management team to the company to ensure that the lender is not left ‘high and dry’ if the company is suffering difficult trading conditions. Therefore if it is a token guarantee to bind the directors to the company, it maybe that the terms of the guarantee can be negotiated. For instance if the bank facilities are for £500,000 the bank may accept a guarantee for a far smaller sum. It is important to limit guarantees where possible in terms of the value and the time.

We have seen many cases where a director has provided a guarantee for the company’s liability and then leaves the company. Some years later the company defaults and the lender contacts the director for proposals to deal with the guarantee. This can obviously cause shock and distress to directors that left the business in some cases years before. By setting a time limit on the guarantee this problem could be avoided. This point comes back to the earlier comment that some directors are not aware of the guarantees they have signed and therefore cannot request a release from the same.

We are increasingly seeing instances of trade creditors requesting guarantees as part of the credit account application process especially in the construction industry. Although the application form is normally quite clear that a guarantee is being provided, a number of directors have unwittingly signed up to a personal guarantee.

If a creditor claims to have a guarantee it is important to request a copy of the guarantee and seek legal advice to deal with the potential liability.

Directors may also be able to purchase insurance to cover potential calls under a personal guarantee.

It may be that rather than providing a personal guarantee that the lender, landlord or trade supplier will negotiate different terms which may initially cost the company more but could protect the director’s personal assets in the longer term.

We offer a free consultation to help you explore and consider the alternatives for your business so please call us on 01273 731144 or e-mail at info@whitemaund.co.uk if you require independent and professional advice.