“The loan is under the company. Why is the bank asking me to pay?”

Imagine starting a business with a friend.

The company needs financing to purchase equipment and cover its operating expenses. The bank approves the facility, subject to both directors signing personal guarantees.

Your business partner reassures you.

“It’s a company loan. We’re only signing because the bank requires it.”

The business runs well for a while. Then customers start paying late, expenses increase and the company falls behind on its repayments.

One day, a demand arrives addressed to you personally.

You check the borrower’s name in the loan documents. It is clearly the company.

So why is the bank asking you to pay?

1. You may have signed in more than one capacity

A director may sign financing documents on behalf of the company and separately sign a guarantee in their personal capacity.

Those signatures serve different purposes.

A personal guarantee can make you responsible for the company’s debt if it defaults. Under section 81 of the Contracts Act 1950, a guarantor’s liability generally follows that of the principal debtor unless the contract provides otherwise.

The company remains the borrower. Your guarantee gives the bank an additional contractual basis to seek payment from you.

Before signing, check each signature section carefully. Are you signing as a director, a guarantor, a provider of security, or in several capacities?

2. “There are two guarantors. Surely I only owe half?”

Do not assume that the debt is divided equally between everyone who signed.

If the guarantee creates “joint and several” liability, the bank may be entitled to claim the full guaranteed amount from either guarantor, subject to the document’s limits and applicable law.

Your percentage of shares does not necessarily determine your exposure.

Someone who owns 20% of the company could have guaranteed more than 20% of its debt. Similarly, an agreement between business partners to bear the debt equally does not, by itself, limit the bank’s rights.

Any right to seek contribution from another guarantor is a separate matter. It does not mean you can simply tell the bank to collect the other half from your partner.

3. “But I resigned last year.”

Leaving the company and being released from a personal guarantee are separate matters.

Resigning as a director or selling your shares does not automatically cancel the guarantee you signed.

If you are planning to leave, review the guarantee before completing your exit. Establish what is required for a release and obtain the bank’s written confirmation of any agreed release.

A promise from the remaining director to “take over everything” may create obligations between the two of you, but it does not automatically release you from your obligations to the bank.

Also check whether the document is a continuing guarantee. Such a guarantee may cover a series of transactions. Revocation raises separate questions about future transactions and liability already incurred; giving notice should not be treated as wiping out an existing debt.

4. Check how much you are actually guaranteeing.

Start with the scope of the guarantee.

Does it cover one particular facility or a wider range of liabilities? Is there a monetary limit? Are interest, charges and enforcement costs included within that limit or payable in addition?

A document headed “Guarantee and Indemnity” also needs to be read in full. The indemnity may create additional obligations that require separate consideration.

These details are worth clarifying while the financing is being arranged. They become much harder to negotiate once the company has defaulted.

5. Already received a demand?

Do not leave it unanswered simply because you believe the company should pay.

Gather the facility letter, guarantee, subsequent amendments, account statements and any correspondence about your resignation or release.

Have the demand reviewed against those documents. Matters to check include the amount claimed, the scope of your obligations, whether the relevant demand requirements have been met and whether there are grounds to dispute liability.

If repayment discussions are appropriate, record any settlement clearly. In particular, establish whether the proposed payment will release you fully or merely reduce the outstanding balance.

6. Before signing, ask what happens if the business cannot pay.

It is natural to focus on getting the financing approved. But a personal guarantee deserves the same attention as the financing amount and repayment rate.

Ask for a copy, read it and obtain independent advice if you need help understanding your exposure.

A business partner may describe it as a formality. Your decision should be based on the obligations in the document.