What happens to a personal guarantee when a director leaves?
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Staff turnover is a normal part of running a business. However, for company directors, the process of moving on and leaving their previous role behind is not as straightforward as it might be for most employees, and sometimes cannot be a completely clean break.
What responsibilities does a director have when they leave a company?
Once a company director’s resignation has been formalised, their liabilities as a director are over and they can’t be held responsible for anything that occurs within the company after that date. However, that does not mean that former company directors cannot be held liable for anything that happened before they resigned.
For example, if a company becomes insolvent up to 3 years after the director’s departure, that director’s conduct will be investigated by the Insolvency Service, as their decision making could have contributed fundamentally to the business’s insolvency. If this is likely to be the case, directors should visit Parachute Law or another specialist before leaving the company to get advice on their rights and the best way forward.
What about guarantees?
As you can guess from the name, a ‘limited company’ means that directors have just that – ‘limited liability’ for any company debts. However, contrary to popular belief, upon exiting a company, a director is not necessarily free of any directors personal guarantee that they have made against any company debts. Departing directors can ask to be released from the personal guarantee but this is down to the lender, who is likely to ask for another guarantor.
Directors should think carefully about giving up their position if they are liable for debts, as they may still be held accountable, but with no control over how the company is run.
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