This guide explains the key risks and the actions you should take to protect yourself.
1. Personal Guarantees and Indemnities: What Are They?
A personal guarantee is a legally binding commitment where you, as an individual, agree to be personally responsible for a company’s debt or obligations or in relation to your business.
An indemnity is a contractual promise to cover losses or damages incurred by another party, often used in situations involving financial obligations, supplier contracts, or leases.
You may have signed personal guarantees or indemnities during your time as a business owner or director for purposes such as:
- Bank loans, overdrafts, or credit facilities
- Commercial property leases
- Supplier contracts or trade credit arrangements
- Equipment finance agreements or hire-purchase contracts
- Utility contracts and service agreements
2. Why Are Personal Guarantees and Indemnities a Risk When Selling a Business?
Ongoing Liability After the Sale
Personal guarantees and indemnities do not automatically end when you sell the business or your shares in the company. This means that, unless you obtain a formal release, you could still be held personally liable for the company’s debts or obligations if the buyer or new owner defaults on payments.
Example Scenario:
You provided a personal guarantee for the company’s £20,000 bank loan. After selling the business, the buyer defaults on the loan. Because you signed the personal guarantee, the bank could pursue you personally for repayment, even though you no longer own the business.
3. Risks Associated with Asset Sales and Supplier Contracts
In an asset sale, you are selling specific business assets (e.g., equipment, contracts, intellectual property, goodwill) but the original company remains in existence. Unlike a share sale, where the company itself is sold, this structure can create risks related to supplier and service contracts.
Ongoing Liability Under Supplier Contracts
Unless supplier contracts are terminated, assigned, or novated to the buyer, the original company—and by extension, you—may remain liable for ongoing obligations under these agreements. This could expose you to:
- Claims for unpaid invoices or debts
- Penalties for breaches of contract after the sale
- Liability for product or service issues under pre-existing warranties
4. Practical Advice to Manage These Risks
To protect yourself from ongoing liabilities under personal guarantees, indemnities, and contracts, we advise the following steps:
Step 1: Identify All Guarantees and Indemnities
- Review company records to identify any guarantees or indemnities you may have signed personally.
- Consider common areas such as bank loans, credit lines, supplier contracts, and property leases.
- If you are unsure whether a personal guarantee or indemnity exists, we advise you to make written enquiries to banks, suppliers, and landlords.
- Contact the relevant lender, supplier, or landlord to request a formal release from the personal guarantee or indemnity.
- If a release is not possible, consider negotiating indemnities or guarantees from the buyer as part of the sale agreement to cover your risk.
- Ensure that any release or indemnity is properly documented in writing.
If you are selling the business through an asset sale, take the following steps to address contracts:
- Terminate contracts: If the buyer does not want to continue a particular contract, you should negotiate the termination of that contract with the supplier or service provider to avoid any ongoing liability.
- Assign or novate contracts: Where the buyer wishes to take over the contracts, you should arrange for either an assignment (where the buyer assumes the benefits of the contract but you may still remain liable for obligations) or a novation (where the buyer takes on full responsibility, and you are released from liability).
- Ensure that any assignment or novation is properly documented and signed by all relevant parties.
- Where it is not possible to secure a release or novation, consider negotiating a contractual indemnity from the buyer.
- This indemnity should state that the buyer will reimburse you for any claims or liabilities arising under personal guarantees, supplier contracts, or other obligations that remain in your name.
5. Understanding the Risks If You Do Not Act
If you do not act on this advice, you could face serious financial consequences, including:
- Being personally liable for outstanding debts under personal guarantees.
- Ongoing liability for obligations under supplier or service contracts, even if the buyer defaults.
- Legal action from lenders, suppliers, or landlords seeking to enforce guarantees or indemnities.
6. Checklist: Actions to Take Before Completion of the Sale
✅ Identify all personal guarantees and indemnities you have signed.
✅ Make written enquiries to banks, suppliers, landlords, and other organisations to confirm the existence of any guarantees.
✅ Seek formal releases from personal guarantees where possible.
✅ Negotiate assignment or novation of supplier contracts as part of the asset sale process.
✅ Secure indemnities from the buyer where releases or novations are not possible.
✅ Document all agreements related to releases, novations, or indemnities to protect yourself after the sale.
Note : This guide is for general information purposes only and does not constitute legal advice. Please consult us for advice specific to your situation.