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When a company director decides to take out a business loan to finance his or her business, the bank often requires a joint and several guarantee. Although this is a common practice, it can expose the company director to significant financial risks, which should be understood before any commitment is made. As experienced lawyers in this field, we explain the essential points you need to know to protect your interests.
What is a joint and several guarantee?
A joint and several guarantee is a legal commitment under which a person, often the company director, undertakes to repay the business loan taken out by the company if it defaults. Unlike a simple guarantee, joint and several liability means that the creditor (usually the bank) can turn directly to the guarantor to obtain repayment, without first having to demonstrate that the company is insolvent.
The differences between a joint and several guarantee and a personal guarantee are discussed in more detail in the article : Simple or joint surety - Solent Avocats
This mechanism enables the bank to secure the loan, but places the director in a situation of personal liability, putting his or her own assets (movable and immovable property) at risk in the event of difficulty.
The risks of joint and several guarantees
- Commitment on personal assets
By acting as joint and several guarantor, the company director exposes his or her personal assets, including property and financial assets, in the event of the company's failure. This can have serious consequences, particularly in the event of seizure or compulsory liquidation. - Duration of commitment
The guarantor's commitment can sometimes last beyond the active life of the loan, if tacit renewal clauses or ancillary guarantees are included in the contract. You need to be particularly careful to avoid remaining a guarantor without knowing it. - No limit on the amount
Some surety agreements do not specify a maximum amount, which can lead to unlimited liability. It is essential that directors negotiate a maximum amount to avoid unpleasant surprises. - Risk of disproportionality
The law prohibits commitments that are manifestly disproportionate to the guarantor's income and assets. However, it is up to the manager to pay close attention to this point and to challenge any abuse.
How can you limit the risks?
- Analysis of the guarantee contract Systematically have a lawyer read over the clauses to identify the points that need to be negotiated. Key elements include the duration, the amount, and the joint and several liability, as well as the essential legal protection for guarantors.
- Negotiating with the bank You can ask for the duration of the commitment to be limited or for your liability to be capped.
- Choice of alternatives In some cases, alternative guarantees (pledges, mortgages on company property) may be considered to avoid personal liability.
In the event of difficulties: what recourse is available to the joint guarantor?
If the bank decides to invoke the joint and several guarantee, there are several legal options available to protect your rights:
- Verification of the validity of the guarantee contract (lack of consent, disproportionality).
- Negotiation of a debt repayment plan.
- Contesting the amounts claimed by the creditor.
Conclusion
Being jointly and severally liable for a business loan is a commitment with far-reaching consequences, and one that is often underestimated by company directors. Good preparation, together with appropriate legal advice, can limit the risks and protect your personal assets.
As experienced lawyers, we can help you with assist you in contesting any joint and several guarantee commitment.
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