A personal guarantee of the shareholders to the company's bank account
Can risks be reduced?
The question in the title is one of the most important in the world of business and commercial life. The requirement of banks to provide a personal guarantee from shareholders is very common but very risky. The good news is that the risks associated with this step can certainly be reduced. How? Read the article in front of you.
By Igal Mor, Adv. & Notary
Accuracy in Legal Advice. Excellence in legal support.
Giving a personal guarantee - when?
When a limited company, at the time of its establishment or while it is already active, turns to the bank for the purpose of receiving credit, the bank will often condition the granting of the credit on the personal guarantee of the shareholders. This will be used by the bank as collateral for the fulfillment of the company’s obligations so that if it cannot repay them, the bank will be able to realize the guarantee signed by the shareholders. This is a standard requirement, widely used in the business world, and is a basic condition in most cases where a private company will request credit from the bank. However, this step inherently involves quite a few risks, therefore, before the shareholders commit to a personal guarantee, it is very important that they thoroughly understand the nature of said guarantee and how to reduce them.
As long as the guarantee is realized by the bank, it is actually a kind of contractual lifting of the veil on the part of the bank towards the shareholders. After all, as a general rule, establishing a company is intended, among other things, to avoid the personal liability of the owners of the company in its debts. Here the exact opposite happens since the shareholders undertake to pay the company’s debts from their own pockets if it cannot meet its obligations. Of course, as far as it is possible, it is better to avoid giving a personal guarantee unless it is necessary to establish the company/continue its activities. It’s very important to consult with an expert attorney before signing the letter of guarantee with the bank in order to reduce the risks involved.
Risk reduction before signing
The first step in reducing exposure to risks is limiting the amount of the personal guarantee. The bank, seeking to receive the optimal collateral, will demand that the guarantee be an unlimited guarantee. In this way, the shareholders will be obligated to the full extent of the company’s obligations, whatever the amount may be. This is the biggest risk in providing a personal guarantee, therefore, under no circumstance should you give in to this demand of the bank. Instead, the shareholders must insist that the guarantee be limited to a specified and predetermined amount. Another point that shareholders should be aware of before taking this step: a shareholder who signs a personal guarantee is not a protected guarantor but a full guarantor.
What is the difference between the two? A protected guarantee means that the creditor is not allowed to act against the guarantor and try to collect the debt from him until he has exhausted all collection procedures against the debtor. On the other hand, within the framework of a full guarantee, the creditor, in this case the bank, may file a claim against the shareholders together with the claim against the company. This further illustrates the importance of not signing a personal guarantee before the shareholders have received legal advice from an expert lawyer who will present them with all the legal and economic aspects of this step, and provide guidance on how to proceed correctly.
Smart business conduct
So far we have talked about reducing the risks before signing the personal guarantee, what, however, should be done afterward? The shareholders must do everything possible to avoid a situation where the bank will demand to realize their guarantee. Therefore, they must regularly monitor, once in a while, the company’s credit status at the bank and adjust the guarantees to the actual amount of the credit. Also, one must make sure to manage responsible cash flow to the bank account. In conclusion, signing a personal guarantee of shareholders to the company’s bank account is a very acceptable requirement, without which, in most cases, the company would not be able to stand up or continue its activities. With the help of professional legal support, the shareholders will be able to reduce the risks involved in this step and increase the chance of a prosperous and profitable company.
Our office has many years of expertise in the field of commercial law and company law and we will be happy to assist you in this complex issue in particular and take the necessary steps to manage your business in an optimal manner in general.
If you would like legal advice regarding the options available to you to safeguard your business, please contact us
Legal advice on personal guarantee matters
Are you required to give a personal guarantee?
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Adv. Mor & Co.’s commercial law department has experience in representing various entrepreneurs, businesses, and corporations from Israel and abroad in a wide variety of legal areas.
We’ll be happy to answer any commercial law questions you have by phone at 02-595-3322 or by WhatsApp at 050-441-1343
Our office has many years of expertise in the field of commercial law and company law and we will be happy to assist you in this complex issue in particular and take the necessary steps to manage your business in an optimal manner in general.
