Q&As

Can a director, who personally settles a company’s debt as a result of a personal guarantee they provided, then reclaim from the company in administration the sums they paid under the guarantee for the amount the company owed to the creditor?

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Published on LexisPSL on 05/02/2019

The following Restructuring & Insolvency Q&A provides comprehensive and up to date legal information covering:

  • Can a director, who personally settles a company’s debt as a result of a personal guarantee they provided, then reclaim from the company in administration the sums they paid under the guarantee for the amount the company owed to the creditor?
  • Right to an indemnity
  • Right to petition for the winding-up of the principal and to prove in the principal's insolvency
  • Right to subrogation of the guaranteed party's rights
  • Rule of double proof

Can a director, who personally settles a company’s debt as a result of a personal guarantee they provided, then reclaim from the company in administration the sums they paid under the guarantee for the amount the company owed to the creditor?

For general guidance on guarantor rights, see Practice Note: Guarantor rights and how to defer them in guarantee documentation—no competition clauses.

Right to an indemnity

As a general rule, the guarantor will have a right to be fully indemnified by the principal to the extent of any loss suffered by the guarantor as a result of paying out under the guarantee.

In a typical finance transaction, the right to an indemnity will arise either under:

  1. an implied agreement, or

  2. an express agreement

An implied agreement is the most common way in which the right to an indemnity will arise in a typical finance transaction. A right to an indemnity arises at law by implied agreement where the guarantee has been given at the express or implied request of the principal. In a typical finance transaction, the guarantee will usually be given by the guarantor at the express request of the borrower.

Alternatively, if the guarantor and the principal have expressly agreed that the principal will indemnify the guarantor, the express agreement will override any implied agreement, to the extent that their terms are inconsistent.

Where a guarantor has paid part

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