Resigned as Director or Sold Your Shares: Are You Still Liable for Debts You Guaranteed for the Company?

Directors and shareholders of small and medium-sized companies are often asked to sign a guarantee when the company applies for a loan, finances a vehicle or machine on hire purchase, leases premises or seeks credit from a supplier. Years later, after they have resigned or sold their shares, a demand letter arrives at home because the company has defaulted.

The first question almost everyone asks is "I left, so why is this still my problem?" The answer is in the documents you signed, not in the position you hold today.

The short answer

Your liability depends on the capacity in which you signed and which document you signed, not on whether you are still a director or shareholder today. Resigning, registering a change of directors and transferring shares are matters between you and the company. They do not change the contract you made with the creditor.

The law. A guarantee is a contract between the guarantor and the creditor. Section 681 of the Civil and Commercial Code limits a guarantor of future debt to the debts specified, within the maximum amount and period agreed. Section 699 allows a guarantee of a continuing business to be terminated for the future. Section 700 releases a guarantor when the creditor extends time to the debtor without the guarantor's consent, and section 698 ends the guarantee when the principal debt is extinguished. Each point turns on the wording of the document and the facts of the case.

This guide concentrates on guarantees. If the company is considering rehabilitation or winding up, see the guide to a company in financial distress. If you are about to resign as a director, see the handover steps in the director resignation guide.

1. In what capacity did you sign: director, co-borrower, guarantor or mortgagor?

Open every document and look at the signature block and the wording above your name. The same signature can have very different effects.

Points to note

• One person can hold several capacities at once, for example signing for the company on the loan agreement and signing a personal guarantee in another document on the same day.
• The bank's thick signing bundle may contain a guarantee, a mortgage and further agreements. If you did not keep copies, ask the creditor for the full set.
• Cheques or bills that you endorsed or guaranteed as aval are another route to personal liability and need to be checked separately.
• For who can bind a company, see the article on authorised signatories.

2. What does the guarantee cover, what is the ceiling, and was it amended?

Once you know you are a guarantor, the next step is to read what you guaranteed.

A single debt or future debt

• A guarantee of a single debt, such as one loan under a numbered agreement, is tied to that debt.
• For future or revolving debt, such as an overdraft, promissory notes or trade credit, section 681 requires the purpose, the nature of the underlying debt, the maximum amount and the period for incurring the debt to be stated (unless it is a guarantee of a continuing business), and the guarantor is liable only for the debts expressly specified.

What to check in each guarantee

• The debtor's name, and the number and date of the principal contract guaranteed
• The type of debt or credit line stated
• The maximum amount guaranteed, and whether it includes interest and fees
• The period for incurring the guaranteed debt, or the end date
• The conditions for termination and how notice must be given
• Whether other guarantors are also bound

Amendments after you resigned

The company may increase the credit line, change the type of facility, renew it or restructure the debt after you have gone. Check:

• Whether you signed an amendment or a new guarantee
• Whether the new line falls within the type of debt and the ceiling you originally guaranteed
• Whether the time for paying a fixed-term debt was extended without your consent (see section 5)

Section 685/1 makes void any agreement on a guarantee that departs from section 681 paragraphs 1 to 3, section 686, section 694, section 698 and section 699. So broadly drafted form wording, or wording that removes these protections, is not always enforceable, but a lawyer needs to read the actual documents.

3. What rights does a guarantor have that a co-borrower does not?

A guarantor who is an individual

• Section 681/1 makes void an agreement that the guarantor is liable in the same way as, or as, a joint debtor. The exception is a guarantor that is a juristic person and agrees to be liable as a joint debtor.
• Section 688: when the creditor demands payment, the guarantor may ask that the debtor be called on to pay first, unless the debtor has been adjudged bankrupt or cannot be found anywhere in the Kingdom.
• Section 689: if it can be shown that the debtor can pay and enforcement would not be difficult, the creditor must enforce against the debtor's assets first.
• Section 690: if the creditor holds the debtor's property as security, the guarantor may ask that it be enforced against that property first.
• Section 694: the guarantor may also raise against the creditor the defences the debtor has.

A co-borrower is a primary debtor and has no rights under sections 688 to 690. The creditor can demand full payment once the debt falls due. If a form calls you a "co-borrower" although you never received the loan, a lawyer needs to consider that from the documents and the facts. Do not simply conclude that you are a guarantor.

A mortgagor of your own property. Section 727/1 limits liability to the value of the mortgaged property at the time of enforcement and makes an agreement for liability beyond that void. But there is an exception that goes directly to directors: where a juristic person is the debtor and a person with management authority or control over its operations mortgages their own property to secure that debt and has also entered into a separate guarantee, the director who both mortgaged and guaranteed may be liable beyond the value of the property.

4. After resignation, a change of directors or a share sale, what has to be released separately?

Each event changes something different, and none of them releases a guarantee by itself.

Ways to be released that actually work

• A release from the creditor is the clearest route. It must be signed by a person with authority for the creditor, identify the guarantee by number and date, and state whether it releases everything or only future debts.
• Termination for the future under section 699 applies to a guarantee of a continuing business with no fixed period. The guarantor gives notice to the creditor and is not liable for transactions the debtor enters into after the notice reaches the creditor. Debts that arose before that remain. A contract term excluding this right is void under section 685/1. Send the notice by a method that proves the date of delivery.
• Extinction of the principal debt. Under section 698 the guarantee ends with it, for example when the company has paid in full and the facility is closed. Ask for a written confirmation that the account is closed and the guarantee has been returned.

When you sell your shares, the share purchase agreement should provide that

• The buyer or the company must obtain a release from the creditor by a set date, or before the final instalment of the price is paid
• A replacement guarantor or security is ready
• The buyer or the company will indemnify you if you are called on to pay before you are released
• Part of the price is held back until the release is delivered

These terms bind only the parties to the share sale, not the creditor, but they give you a right to claim reimbursement. See the service on business sales.

5. After you left, what events may reduce or release your liability?

Check what the creditor and the company did while you were no longer there.

• Extension of time. Under section 700, if you guaranteed a debt payable at a fixed time and the creditor gives the debtor more time, the guarantor is released unless he agreed to it. An agreement given in advance is not enforceable, except where the guarantor is a financial institution or guarantees for a fee as a regular business. But section 691 provides that an agreement reducing the debt made after the debtor has defaulted, if it extends the time for payment, is not treated as an extension of time under section 700. So the date and content of each restructuring agreement need to be examined.
• Reduction of debt. Under section 691, if the creditor agrees a reduction of the debt with the debtor, the creditor must notify the guarantor in writing within sixty days, and if the reduced debt is paid in full, whether by the debtor or the guarantor, the guarantor is released.
• Late notice. Section 686 requires the creditor to give the guarantor written notice within sixty days of the debtor's default. If notice is not given in time, the guarantor is released from interest, damages and incidental charges arising after the sixty days (not from the principal), and the creditor cannot demand payment from the guarantor before the notice reaches him.
• Paying on the original terms. Section 686 also lets the guarantor choose to pay only the part for which he is liable on the payment terms the debtor had before default, which may allow payment by instalments instead of one lump sum.

These points must be proved with documents, such as the date the company defaulted, the date you received the letter, and a copy of any restructuring agreement.

6. You have received a demand letter: what documents should you prepare?

Do not

• Sign an acknowledgement of debt, a settlement memorandum or a new guarantee before a lawyer has reviewed it
• Make a partial payment without a letter stating in what capacity and for which debt you are paying
• Leave the letter unanswered, because the next step is often a lawsuit

Documents to collect

• The demand letter with its envelope, and a note of the date received
• The guarantee, the mortgage and every amendment bearing your name
• The main credit agreement, the credit approval letter and any debt restructuring agreement you can find
• Your resignation letter, proof it was submitted to the company, and the company certificate showing the date the change of directors was registered
• The share purchase agreement, the shareholder register and any agreement on release of the guarantee or indemnity
• Any letters you sent the creditor asking for release or terminating the guarantee, with proof of sending
• Any letters the creditor sent, such as a notice of default or notice of a reduction of debt
• The statement of account you requested from the creditor, separating principal, interest, fees and the date of default
• A list of the company's assets held by the creditor as security
• Information on the company's status, for example whether it is still trading, in rehabilitation or subject to a bankruptcy petition

What a lawyer will check

• The capacity in which you signed and which contract applies to the debt demanded
• Whether the debt demanded is within the scope, ceiling and period guaranteed
• Whether the creditor gave notice within sixty days under section 686, and whether the interest claimed is correct
• Whether there is a ground for release under section 691, 698, 699 or 700
• Your rights under sections 688 to 690, if you are an individual guarantor
• Your right of recourse against the company under section 693 after payment, and your contractual right to be reimbursed by the share buyer

If the company is in rehabilitation or bankrupt, special rules affect the guarantor. See the overview in the guide for creditors in bankruptcy and rehabilitation, and if you have been sued or enforcement has begun, see the guide for debtors facing enforcement.

7. Checklist for guaranteeing a company's debt

Before resigning or selling shares

• Collect every guarantee, mortgage and amendment bearing your name
• Identify the capacity in which you signed each one: for the company, co-borrower, guarantor or mortgagor
• Check the scope, ceiling, period and termination conditions of each guarantee
• Negotiate for the company or the share buyer to provide a replacement guarantor or security before you actually leave
• Put release, indemnity and hold-back terms in the share purchase agreement or handover record

After leaving the company

• Send a request for release, or a termination for the future under section 699 if the conditions are met, and keep proof of the date of delivery
• Obtain a release from the creditor signed by an authorised person, identifying the contract by number and date
• Follow up that mortgaged property has been released from the mortgage at the Land Office
• Ask the company to tell you when the credit line is increased, the debt is restructured or it defaults

When you receive a demand letter

• Record the date received, and do not sign any new document before it is reviewed
• Request a statement of account separating principal, interest and the date of default
• Collect the documents listed in section 6 and send them to a lawyer for review
• Reply to the creditor in writing within a reasonable time

Further reading

• Director resignation: handover checklist — resignation steps and the handover record
• A company in financial distress: the options — rehabilitation, debt negotiation or winding up
• Creditor guide to bankruptcy and rehabilitation — when the company enters a court process
• Debtor facing enforcement — once a judgment has been made
• Risks of guaranteeing a loan — the basics before you sign
• Seizing a guarantor's spouse's assets — the effect on family property
• Services: business sales · contracts and business documents

Your position in a company can change by resignation or a share sale, but a guarantee changes only by a release from the creditor, termination under the law, or extinction of the debt.

We help read guarantees and amendments, draft letters requesting release or termination, draft release terms in share purchase agreements, and respond to creditors' demand letters. For an initial consultation, call +66 92 254 2045 or send us the details. See also contracts and business documents.

This guide is published by Suwanvara Law Firm — a Khon Kaen law firm established in 1986. General information only, not legal advice on a specific matter.