When a Director Signs Personal Surety for Business Debt: What You Need to Know

In the complex world of business finance, the lines between personal liability and business obligations can sometimes become blurred. One scenario that often raises eyebrows is when a director of a company decides to sign a personal surety for the business's debts. But what does this entail, and what are the implications for all parties involved? Let's delve into this topic and shed light on the ramifications of such a decision.

Make an informed decision before signing Personal Surety for Business Debt

A Closer Look at Personal Surety

Before we explore the impact of personal surety, let's first understand what it entails. When a director signs a personal surety agreement, they are essentially guaranteeing that they will personally cover any debts or financial obligations of the business if the company is unable to do so. In essence, this means that the director's personal assets could be at risk if the business fails to meet its financial commitments.

The Weight of Personal Liability

Signing a personal surety agreement is not a decision to be taken lightly. It puts a significant amount of personal liability on the director, as they could potentially face severe financial repercussions if the business runs into financial trouble. This move essentially intertwines the director's personal finances with those of the company, creating a high-stakes situation that requires careful consideration.

Implications for the Business

While signing a personal surety may provide additional security for creditors and lenders, it can also impact the business in several ways. Firstly, it may affect the company's ability to secure future financing, as potential lenders may be hesitant to extend credit to a business where the director's personal assets are on the line. Additionally, if the business fails and the director is unable to cover the debts, it could have long-lasting consequences for the company's reputation and future viability.

Protecting Personal Assets

Given the potential risks involved in signing a personal surety, directors should take steps to protect their personal assets. This could involve setting up legal structures such as trusts or limited liability companies to shield certain assets from being at risk in the event of a business failure. Seeking legal advice from professionals specializing in business law and insolvency can be crucial in navigating this complex landscape and safeguarding personal wealth.

Make sure you are released from Suretyship

When signing personal surety, the financial institution may state that the guarantor (in this case the director/member of the company) not be released from the suretyship without the financial institution’s prior written consent. The guarantor would only be entitled to request a release from the suretyship once all of the obligations under the suretyship have been settled.

Once the indebtedness secured by the guarantee has been settled, it is important to obtain written confirmation from the financial institution that the suretyship has in fact been terminated and guarantor released from any further obligation.

In the Event of Business Liquidation

If the director/member of a business signed personal suretyship for any of the debt of the business, then liquidation will not cancel the suretyship and that director/member will remain personally liable for that debt after liquidation. A payment arrangement can be made with the Financial Institution that the suretyship was signed with.

However, if the director/member is unable to make a payment arrangement then there exists another legal solution called Voluntary Surrender. This solution can write off up to 75% of personal debt. Only 25% of the debt is repaid to creditors.

Find out more about Volunatary Surrender/Sequestration: https://www.solvendi.co.za/sequestration

Find out more about Business Liquidation:  https://www.solvendi.co.za/business-liquidation

Final Thoughts

In conclusion, the decision to sign a personal surety for business debt is a serious one that requires careful consideration of the risks and consequences involved. Directors must weigh the potential benefits against the personal liability they would be undertaking and take proactive steps to mitigate any negative outcomes. By understanding the implications of personal surety agreements and seeking expert advice when needed, directors can make informed decisions that protect both their business and personal finances.

As the business landscape continues to evolve, it is essential for directors to stay informed about financial matters that can impact their personal and professional lives. By being aware of the implications of personal surety agreements, directors can navigate the complexities of business finance with confidence and ensure the long-term success of their ventures.

Personal surety for business debt requires careful consideration of the risks and consequences involved

If you require advice with regards to Sequestration, Voluntary Surrender, Business Liquidations, Insolvency, Bankruptcy or Credit Rehabilitation kindly contact SOLVENDI as follows:

National: 087 220 0710

Head Office: 010 880 7589

Email: consultations@solvendi.co.za 

Website: www.solvendi.co.za for live chat or more information.