Loan Tip: What Happens to a Guarantee if Director Resigns?

When a company borrows it is nearly always necessary for the director of the company to give a guarantee to the lender. What would happen to that guarantee if the director were to resign?

Guarantees for loans last until either the loan is paid back or the lender releases the guarantee.

Example

Homer is director of ABC Pty Ltd and gives a personal guarantee when the company borrows to buy a house.

Homer resigns as director and Bart becomes the new director of the company.

Homer is not released from his guarantee. It remains in place until the loan is paid out or refinanced or renegotiated. Homer is still on the hook – but Bart isn’t as he hasn’t given a guarantee.


Note that changing a director would likely be a breach of the terms of the loan agreement if the mortgagee’s permission was not given.

 

Many years ago I came across a guy who was appointed director of a company operating a medium sized business. He thought he was a hot shot because he was a director. But the owners of the company got several car loans in, through the company, and he was asked to sign paperwork which had him personally guaranteeing the loans.

The company became insolvent and he was about to be bankrupted and lose his family home even though he had resigned as director a few months ago as the guarantees were still in place.