A director of a farming business may resign, sell their shares or retire from the partnership believing that their financial exposure ends when they leave.
However, if that director has given a personal guarantee, the position may be very different.
Is a departing director automatically released?
Usually, no. A personal guarantee is a separate contractual obligation between the guarantor and the creditor, which is commonly a bank, agricultural supplier, landlord or equipment finance provider.
Resignation as a director, transfer of shares or departure from the day-to-day business does not generally terminate that contract.
The key question is not whether the director remains involved in the farm, but what the guarantee says.
Many guarantees are drafted as “continuing security” and they may cover all money owed by the business from time to time, including liabilities arising after the guarantor has left.
Some also contain a separate indemnity, creating an additional and potentially wider obligation to compensate the creditor for loss.
Can the guarantee be cancelled by giving notice?
The guarantee may permit the guarantor to give written notice terminating future liability.
The notice requirements must be followed precisely, including the stipulated method of service and notice period.
Each guarantee is different and therefore must be carefully considered on its own terms.
Even where termination is effective, it will not usually extinguish liability already incurred.
The guarantor may remain responsible for:
- Borrowing outstanding on the termination date;
- Interest, charges and enforcement costs;
- Liabilities under existing facilities; and
- Later advances made under commitments entered into before termination.
Some guarantees cannot be terminated unilaterally and in that situation, an express written release from the creditor will normally be required.
A promise from the remaining directors that they will “take over” the guarantee does not bind the creditor.
What if the lending arrangements change?
A material variation of the underlying agreement, made without the guarantor’s consent, may sometimes discharge the guarantee.
The traditional principle in Holme v Brunskill (1878) 3 QBD 495 is that a surety may be released where the creditor and debtor alter their contract without the surety’s agreement, unless the change is plainly unsubstantial or cannot prejudice the surety.
Modern guarantees, however, often anticipate variations, extensions of credit, changes in business structure and additional security.
The Court of Appeal’s decision in Triodos Bank NV v Dobbs [2005] EWCA Civ 630 illustrates that the precise wording of the guarantee – and whether later lending falls within what the parties contemplates – will be critical.
A farming business may evolve significantly after a director leaves: further land may be acquired, seasonal borrowing increased, machinery refinanced or the business restructured.
Whether the former director remains liable will depend upon the guarantee’s scope and any valid variation clauses.
It is, therefore, critical that any document is considered in detail once the director leaves as they may unexpectedly become liable for future borrowing taken by the company and which they had no knowledge of.
Practical steps on departure
A director leaving a farming business should:
- Identify every personal guarantee and indemnity that they have entered into;
- Obtain the latest facility and security documents (if more than one has been entered into);
- Check whether, and how, future liability may be terminated;
- Serve any required notice correctly;
- Seek an express written release from each creditor;
- Retain evidence of release or termination; and
- Address continuing exposure in the share sale, retirement or settlement documents.
An indemnity from the continuing owners may provide recourse between the parties, but it does not release the guarantor from liability to the creditor.
The central lesson
Leaving the business and leaving its liabilities are not the same thing. Until the guarantee is validly terminated, replaced or expressly released, a former director may remain personally exposed – sometimes years after leaving the farm.