Directors' personal guarantees

Since the landmark case of Salomon v Salomon in 1897, it has been clear that a company has separate legal personality and is responsible for its own debts.  Neither its directors nor its shareholders can generally be called on, even if the company is in default.

However, for smaller, owner-managed companies this often means that banks, landlords and even suppliers may agree to deal with the company only if its obligations are backed up by a personal guarantee from the individuals standing behind it.

Directors can be put under considerable pressure to give personal guarantees to get their company's business up and running and it is easy to be over-optimistic about the company's prospects.  But a guarantee will put the director's personal assets at risk and should not be given without a full understanding of the implications.