When a director decides to exit a business, partnership, or joint venture their obligations will not automatically cease upon their exit, especially where a personal guarantee has been provided. Therefore, careful consideration needs to be given to the potential legal and financial aspects of exiting a company or partnership. This article highlights the importance of obtaining documented release from personal guarantees and potential implications for the exiting party.
In simple terms, a personal guarantee is a legal promise made by an individual (“the Guarantor”) that they will meet and perform the obligations of a third party if that third party is unable to repay a debt. In a commercial context, personal guarantees are associated with creditors (e.g lenders), leasing, or other contractual obligations and are commonly used where the lender deems the borrower as an elevated risk. Therefore, a personal guarantee acts as a safeguard mechanism against the debt for the lender.
Personal guarantees are not all the same, so it is crucial that the guarantor understands the level of debt that the third party holds, as well as understanding the legal implications of providing a guarantee. Once a joint venture or partnership has been dissolved, or a director decides to resign, if a guarantee has been provided their legal obligation might not cease upon the dissolution or resignation. Generally, there is no time limit on a guarantee which makes it critical to obtain documented release from the guarantor. To be released, the guarantor must make a request to the creditor and any other party to the arrangement. For example, upon a director’s resignation the director can contact the lending party to request a release or request an incoming director to continue with the guarantee providing all parties provide consent.
To make the release legally binding the parties will need to reduce the agreement to a Deed which will act as both a protective measure from disputes and formalise the closure of the agreement which then discharges the guarantor’s obligation. Another important reason why documented release ought to be obtained is that personal guarantees can impact an individual’s credit history. If the lender calls on the guarantee after the dissolution of the partnership, or the director has exited, and a Deed has not been executed then the ramifications to the individuals borrowing capacity will most certainly be impacted.
Documented release from personal guarantees allows for clarity and certainty for all parties involved, which aids in reducing potential misunderstandings. Thus, making the process a necessity for business exits. Prioritising documented release will protect against legal pitfalls and protect an individual’s financial wellbeing post severing business ties.
If you require further advice on how to obtain documented release or how a personal guarantee interacts with your business, or other commercial matters, then our office can assist you.
