Hello, I am currently a Director of a company that has been established for 20 years and is trading profitably. I have been asked to become a Director of a new start up business, in a different industry. When signing a lease for the new business premises, the Landlord requires me to give a Personal Guarantee. My question is this, if I give a personal guarantee as a Director of the brand new entity, does the Guarantee only relate to that brand new entity, or legally does it also mean the Guarantee includes my Directorship of my current existing company? Naturally I am looking to keep my long standing established company separate and out of the new transaction and not risk that. Thank you. T Brien.
Directors Guarantee
- Thread starter Director63
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There's a bit of mixed terminology use in your post, so let me unravel things a bit for you:
- A company is a separate legal entity to you as a person; and
- Directorship is a role in the company - it is a separate and distinct role for each company; but
- The practicality of this division can get blurred somewhat where the companies are related at law (such as via common controlling ownership).
Personal guarantees from directors are commonplace when dealing with 'proprietary' companies. These are the 'run of the mill' small business type companies which are owned privately; as opposed to 'public' companies, such as the ones traded on the ASX.
The guarantee in essence is a promise from you personally to step in to perform a promise made by the company which you are giving the guarantee on behalf of, if that company fails to perform the promise itself. As an example: The company promises to pay rent under the lease. If it fails to do so, the landlord can expect you as the guarantor to fulfil that promise by paying the rent yourself.
That brings me to the answer to your question. Your 'directorship' itself has nothing to do with the guarantee, except that you're asked to give a guarantee because you are a director (really, it could be anyone asked the guarantee but directors are often the logical choice). There's no risk to the first company directly because neither it, nor your 'directorship', has a role in the guarantee for the second company unless specifically asked to do so. However, there is an indirect risk in that if you are called to fulfil your guaranteed obligations and are unable to do so then that could lead to bankruptcy. If you're bankrupted you cannot be a director of any company - which means the prior company needs to find/rely on other director(s) (and in practical terms the second company is likely to already be insolvent and possibly in the process of being wound up).
- A company is a separate legal entity to you as a person; and
- Directorship is a role in the company - it is a separate and distinct role for each company; but
- The practicality of this division can get blurred somewhat where the companies are related at law (such as via common controlling ownership).
Personal guarantees from directors are commonplace when dealing with 'proprietary' companies. These are the 'run of the mill' small business type companies which are owned privately; as opposed to 'public' companies, such as the ones traded on the ASX.
The guarantee in essence is a promise from you personally to step in to perform a promise made by the company which you are giving the guarantee on behalf of, if that company fails to perform the promise itself. As an example: The company promises to pay rent under the lease. If it fails to do so, the landlord can expect you as the guarantor to fulfil that promise by paying the rent yourself.
That brings me to the answer to your question. Your 'directorship' itself has nothing to do with the guarantee, except that you're asked to give a guarantee because you are a director (really, it could be anyone asked the guarantee but directors are often the logical choice). There's no risk to the first company directly because neither it, nor your 'directorship', has a role in the guarantee for the second company unless specifically asked to do so. However, there is an indirect risk in that if you are called to fulfil your guaranteed obligations and are unable to do so then that could lead to bankruptcy. If you're bankrupted you cannot be a director of any company - which means the prior company needs to find/rely on other director(s) (and in practical terms the second company is likely to already be insolvent and possibly in the process of being wound up).
Thank you Rob, sorry about the mixed terminology in my original post, but you answered my query brilliantly. If it is okay I will keep your contact details and if I need further advice I will contact your office and become an official client. I am also based on the Gold Coast so having a business lawyer would be very helpful. Thanks again!
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