By Prakhar Rai, Founder, My Legal Pal. Advocate, Bar Council of India. LL.B, NLSIU Bangalore. Master of Business Laws.
Quick answer: A personal guarantee is your own signed promise to pay your company’s debt, or to perform its obligations, if the company can’t. The creditor can then go after your personal assets. It is a separate contract from the company’s deal, it often covers more than the one transaction you had in mind, and resigning as a director usually doesn’t cancel it.
Key takeaways
- You usually sign twice: once for the company, once in your own name. The second signature is the guarantee.
- Words like “all monies”, “unlimited”, “joint and several” and “continuing” make it far bigger than it looks.
- Resigning from the board doesn’t release you unless the creditor signs a release.
- Rules on form, family guarantors and insolvency differ by country, so check the governing law.
- Caps, time limits, notice of default and release triggers are all worth asking for before you sign.
Most founders know the company is its own legal person. That’s the whole reason you incorporated. Then a bank, a landlord or a big supplier sends over a contract with one extra page, and that page quietly puts the separation aside.
It’s called a personal guarantee. You sign it once, usually in a hurry, and it can sit in a drawer for years until the business has a bad quarter.
I’m writing this the way I’d explain it over a call: what the clause actually does, the words that make it bigger than it looks, how it reads in different countries, and what you can ask for before you sign.
When I go through a contract with a founder, the personal guarantee is usually the page that got the least attention at signing and gets the most attention at default. Nobody reads it closely when the deal is going well. That’s the reason I wanted to write this down properly.
What a personal guarantee actually is
It’s a promise from you, as an individual, that if your company doesn’t pay or doesn’t perform, you will. The lender or counterparty can then come after your own money and assets, not just the company’s.
Two things catch people out.
First, the guarantee is a separate contract with a separate signature. In many deals you sign twice: once for the company (“by its director”) and once in your own name. The second signature is the one that matters here.
Second, it’s not limited to loans. Personal guarantees turn up in:
- bank loans and overdrafts
- commercial leases (landlords love them for new companies)
- supplier credit accounts, where the supplier ships first and invoices later
- equipment finance and vehicle leases
- payment processor and merchant agreements
- performance obligations to a large customer, where the customer wants a person standing behind the company
If a counterparty doesn’t trust a young company’s balance sheet, expect to see one.
How the same clause reads in different places
The idea is the same everywhere. The rules around it aren’t. This is general information, so have a lawyer in the relevant country check the details.
United States. There’s no single national rule. State law governs, and lenders commonly ask for an unlimited guaranty with waivers of the defences a guarantor would normally have. Pay attention to whether it’s a guaranty of payment or a guaranty of collection. With a guaranty of payment, the lender can usually go straight to you without first chasing the company.
United Kingdom. A guarantee generally has to be in writing and signed by the guarantor under the Statute of Frauds 1677. If the guarantor is a spouse or family member who isn’t running the business, English courts expect real steps to make sure they understood what they signed, which is why you’ll see independent legal advice certificates after the Etridge decision.
India. The Indian Contract Act, 1872 deals with guarantees in sections 126 to 147. Two points surprise people. A guarantee can be oral or written under section 126, though nobody should rely on an oral one. And under section 128 the guarantor’s liability is co-extensive with the company’s unless the contract says otherwise, which in practice means a creditor can often proceed against you without exhausting the company first. Since the Supreme Court’s 2021 decision in Lalit Kumar Jain v. Union of India, insolvency proceedings can also be started against personal guarantors of companies, and the company’s own insolvency does not by itself wipe out your guarantee.
Elsewhere (UAE, Singapore, EU and others). Formality rules, caps on what a guarantee can cover and protections for family guarantors differ a lot. Don’t assume your home-country rule travels with the contract. Look at the governing law clause first.
At a glance (general information, confirm locally):
| Writing and signature needed? | Point to watch | |
|---|---|---|
| United States | Generally yes, under state law | Payment vs collection guaranty, waived defences |
| United Kingdom | Yes, signed in writing | Independent advice for family guarantors |
| India | No, oral guarantees are allowed | Liability co-extensive with the company’s; insolvency routes against guarantors |
| UAE, Singapore, EU | Varies | Check the governing law and local formality rules |
The words that make it bigger than you think
I read guarantees by hunting for a handful of phrases. If you see them, slow down.
- “All monies” or “all liabilities.” The guarantee isn’t tied to one loan. It covers everything the company owes the lender now and in future. A guarantee you signed for a small overdraft can end up covering a much larger facility.
- “Unlimited.” No cap. The amount is whatever the company owes, plus interest, plus costs.
- “Joint and several.” If there are three founders, the creditor can pursue any one of you for the full amount, and you then chase the others for their share. Being a 20% shareholder doesn’t make you a 20% guarantor.
- “Continuing.” The guarantee doesn’t fall away after the first repayment or the first contract term. It keeps running until the creditor releases it in writing.
- “On demand.” You pay when asked. There’s no argument period.
- Waiver of defences. You agree in advance not to raise points a guarantor could normally raise, for example that the creditor changed the deal without telling you. Many guarantees also say the creditor can vary, extend or refinance the underlying debt without your consent and you stay bound.
- “Costs and enforcement expenses.” Legal fees, collection costs and interest sit on top of the principal.
Guarantee versus indemnity, quickly
People mix these up and the difference matters. A guarantee is secondary: it depends on the company owing something. An indemnity is a primary promise to cover a loss, and it can survive even where the underlying debt turns out to be unenforceable. Lenders sometimes add an indemnity limb to a guarantee for exactly that reason.
| Guarantee | Indemnity | |
|---|---|---|
| Nature | Secondary, depends on the company’s debt | Primary promise to cover a loss |
| If the underlying debt is unenforceable | Usually falls with it | Can still stand |
| Typical use | Loans, leases, supplier credit | Losses, claims, third-party liability |
I’ve covered how indemnities work, and where they go wrong, in our guide to the indemnity clause. Read that if the document in front of you uses the word indemnity anywhere near your name.
Does resigning as a director end a personal guarantee?
Short answer: usually not. This comes up all the time. Resigning usually doesn’t release you. The guarantee is a contract between you and the creditor. Stepping down from the board doesn’t cancel it. Unless the guarantee itself says it ends when you leave, or the creditor signs a release, you stay on the hook for the debt the guarantee covers, and often for debt taken on after you left if the wording is “continuing” and “all monies”.
If you’re planning an exit, deal with the guarantee in the exit paperwork. Ask the creditor for a written release and don’t treat “the company will sort it out” as a plan.
What can you negotiate in a personal guarantee?
Short answer: more than most founders assume. Founders often assume the bank’s form is take-it-or-leave-it. It usually isn’t, especially for a smaller landlord or supplier. Things worth asking for:
- A cap. A fixed amount, or a fixed number of months of rent or payments.
- A time limit. The guarantee ends after a set period, or steps down as the company pays on time.
- A named obligation. Tie it to this lease or this facility, not “all monies”.
- Several, not joint, liability. Each guarantor answers only for an agreed share.
- Notice of default. The creditor must tell you promptly if the company misses a payment, with a chance to fix it before costs pile up.
- Consent for changes. If the creditor extends, increases or restructures the debt, your guarantee doesn’t automatically stretch with it.
- A release trigger. For example, the guarantee drops away once the company hits a revenue figure, repays a set amount or provides a cash deposit.
- A substitute. A cash deposit, a bank guarantee or a letter of credit sometimes satisfies a landlord who wanted your signature, and it caps the exposure at a known number.
- A release on sale or exit. If you sell your shares or leave, the new owners replace you as the guarantor.
If you want a second pair of eyes on a specific draft, our contract review and revision team does this kind of mark-up, and if the counterparty is pushing back, contract negotiation is the service that handles the back and forth.
Check these before you sign
- Is the guarantee in a separate document or buried in the main agreement? Find your own signature line.
- What exactly does it cover: one obligation, or everything?
- Is there a cap and an end date? If not, ask why.
- Does the creditor need to tell you before changing the underlying deal?
- Does it survive your resignation or the sale of your shares?
- Which country’s law governs it, and which courts hear a dispute?
- If you’re a co-founder, what are the other guarantors signing, and can the creditor go after only you?
- Do you have a copy? Keep one with your own records, not just the company’s.
Pair this with a look at how the company’s own liability is limited. A business with no cap on what it owes customers can end up passing that exposure straight to its guarantors. That’s covered in our piece on why a missing limitation of liability clause can sink a startup.
If a demand has already arrived
Don’t ignore it, and don’t reply with a casual “we’ll sort it out” email. Informal promises can restart time limits or be read as admissions. First get the guarantee and the underlying contract in front of you and check three things: whether the demand matches what the guarantee covers, whether the amount is calculated correctly, and whether the creditor followed the notice steps the document requires. Then get advice before you respond. Our guide on what to do when you’re accused of breaching a contract covers the immediate first steps.
Quick answers
Can a personal guarantee be oral? It depends on where you are. India’s Contract Act allows oral guarantees, while many other countries, including the UK, require a signed written document. Either way, a written guarantee is the norm and an oral one is very hard to prove.
If the company goes insolvent, am I off the hook? Not automatically. The guarantee is a separate promise. The company’s insolvency is usually the very event the guarantee is meant to cover.
Can I sign as a guarantor for just part of the debt? Yes, if the creditor agrees. A capped or several guarantee is common. You have to ask, and get it written into the document.
Does a personal guarantee always mean I’ll lose my house? No. It means the creditor can pursue your assets through the legal process in your country. What can actually be reached depends on local law, on how your assets are held and on what other security the creditor already has.
A note on who we are
My Legal Pal is an international team of contract lawyers with US law experience. We aren’t a US law firm, and we aren’t a local firm in every country mentioned above. This article is general information and not legal advice on your facts. If you’re about to sign a guarantee, have the document reviewed by a lawyer qualified in the country whose law governs it.
About the author. Prakhar Rai is an advocate enrolled with the Bar Council of India and the founder of My Legal Pal. He holds an LL.B from NLSIU Bangalore and a Master of Business Laws, and works on contract drafting, review and disputes for founders and businesses across borders. Full profile
