Trade Credit Accounts Backed by a Personal Guarantee

If your husband signed a personal guarantee when the builders merchant account was opened, the supplier can claim the unpaid balance from his estate. If he signed only as a director, on the company's behalf, it cannot. The whole question turns on one signature on a credit application form that may be ten years old.

What makes this frightening is that almost nobody remembers signing one. A builders merchant, plumbing wholesaler, timber yard or electrical factor rarely gives credit to a small limited company on the company's own strength. It asks a director to stand behind the account personally, and the clause that does it sits in small print immediately above the signature box. In the weeks after a director has died the statements keep arriving, and a credit controller eventually writes to the family, usually before anyone has established whether a guarantee exists at all.

So do not accept the claim, and do not pay it out of the estate, until you have seen the document. Write to every supplier and ask for a copy of the signed application. A guarantee that the supplier cannot produce is generally a guarantee that cannot be enforced.

The short answer: it depends on what he signed

A director signs in two entirely different capacities, and the same pen on the same page can do both.

Signing for and on behalf of the company binds the company alone. If the company cannot pay, the supplier joins the queue of unsecured creditors and, in most small insolvencies, recovers little or nothing. The director's own money is not involved.

Signing a personal guarantee binds the man. It is a separate promise, made in his own name, that if the company does not pay, he will. It usually appears as a short block of text at the foot of the credit application, sometimes headed "Guarantee", sometimes headed nothing at all, and it typically asks for his home address and date of birth. That request for a home address is the giveaway. A company account does not need a director's home address. A guarantee does, because the supplier wants to know where to find the person.

So the first job is not negotiation. It is document retrieval. Until you are holding the page he signed, nobody knows what the position is, including the credit controller writing to you.

Why merchant and wholesaler accounts so often carry a guarantee

Trade credit is unsecured lending by a business that is not a lender. A merchant hands over materials on thirty-day terms with no security, on margins that cannot absorb many bad debts. Asking a director to stand behind the account is the cheapest risk control available, and it costs the supplier nothing to include on a form.

That is why guarantees turn up right across the trades: builders merchants, plumbing and electrical wholesalers, timber and steel yards, plant and tool hire, motor factors, catering wholesalers and print suppliers. If the business bought anything on account rather than on a card, treat a guarantee as possible until the paperwork says otherwise.

There is a second clause worth looking for on the same form. Most trade terms include retention of title, which says the goods remain the supplier's property until they have been paid for. That matters in the days after a death, because materials sitting unfixed in a yard or a van may still legally belong to the supplier, while materials already built into a customer's house generally do not. If a supplier arrives wanting stock back, ask to see the clause and photograph everything before it leaves.

What a personal guarantee commits the estate to

Read the wording rather than assuming the worst. Guarantees vary more than people expect, and the differences are worth real money.

• Is it capped? Some guarantees are limited to a stated maximum. Others are unlimited, and cover whatever the account happens to owe on the day it is called.
• Is it continuing? Most trade guarantees are "all monies" or continuing guarantees, covering the balance from time to time rather than the balance on the day it was signed. A guarantee given when the business was two men and a van can still cover the account it grew into.
• Is it a guarantee or an indemnity? A guarantee is secondary: the company has to default before the guarantor is asked. An indemnity, or a "principal debtor" clause, is a primary obligation, and lets the supplier come straight to the guarantor. Plenty of trade forms are drafted as both at once.
• Does it cover interest and costs? Late payment interest and legal costs are routinely added, so the sum claimed can be noticeably larger than the invoices behind it.
• Who else signed? If a second director or a spouse signed too, they are usually jointly and severally liable, meaning each of them can be pursued for all of it rather than a share. That is a different and more urgent problem, set out in what happens when a spouse has signed as co-guarantor.

Death does not cancel the promise. The liability that had already built up when he died is a debt of his estate, and the supplier can claim it in the administration alongside everything else he owed. What death can do, under many guarantee wordings, is stop the meter going forwards: a continuing guarantee often allows the guarantor, or their representatives, to end it for future supplies by written notice. If the company is still trading and still ordering, write to every supplier now, formally notifying them of the death and terminating any guarantee for future deliveries. That does not touch the existing balance. It stops the estate's exposure growing while the family works out what to do.

How to find out which accounts were guaranteed

Nobody keeps a list of these, so you have to build one. The bookkeeping is the fastest route.

Start with the purchase ledger in the accounting software, or the accountant's file, and pull out every supplier the business bought from on credit in the last two years. Cross-check that against the business bank statements for regular payments, and against the post and the email inbox, which is where the statements and reminders are already arriving. Delivery notes in the van and in the yard fill most of the remaining gaps.

Then send the same letter to each supplier. Ask them to confirm in writing whether they hold a personal guarantee signed by the deceased; to send a copy of the original signed account application, including the terms in force when it was signed; to confirm the current balance and the date of the last delivery; and to hold the account while the estate is dealt with. Keep every reply, and put the date on it. If a supplier says a guarantee exists but cannot produce the signed page, say so plainly and ask again in writing, because a guarantee generally has to be evidenced in signed writing before anyone can enforce it.

Search Companies House as well, for every company he was ever a director of. Guarantees given years ago for a company that has since been dissolved do not automatically vanish with it, and families are frequently unaware that an earlier venture existed at all.

What the supplier can do, and what it cannot

It can claim in the estate. The personal representative gathers in the assets, pays the funeral and administration expenses, then pays the debts before anything reaches the beneficiaries. A guaranteed trade debt sits with the ordinary unsecured creditors: if the estate is comfortably solvent it will simply be paid, and if it is not, the creditors share what there is.

It can, where the guarantee is drafted as an indemnity or carries a principal debtor clause, come to the estate without first exhausting the company. Where it is a straightforward guarantee, it normally has to demand from the company first and be refused.

What it cannot do is make you personally liable because you were married to him. Collection letters are sometimes phrased to imply otherwise, addressed to "the family" and written as though payment were a formality. Unless your own signature is on a guarantee, a joint account or a joint agreement, the claim is against the estate and not against you. The same principle runs through this whole subject, which is why it is worth reading alongside which of a partner's debts actually follow the survivor: liability tracks signatures, not relationships.

One warning for whoever is administering the estate. Do not pay the beneficiaries and then discover a guarantee. A personal representative who has distributed an estate and is afterwards met by a valid creditor can be personally liable for that debt. The standard protection is to advertise for creditors in The Gazette and in a newspaper local to the deceased, and to let the stated notice period of at least two months expire before distributing anything. It is inexpensive, and on an estate with any business history behind it, it is not optional.

If the company is still trading, and if it has stopped

If the company survives him and keeps paying its suppliers, the guarantee may never be called at all. That is the outcome worth protecting. Tell the suppliers what has happened rather than going quiet, because the instinct when a director dies is to withdraw credit and demand cash on delivery, and for a small builder that cash-flow shock does more damage than the debt.

Check who can actually run the company now. If he was the sole director, the company may have nobody able to sign anything. The model articles that most private companies adopt contain a route for the personal representatives of the last remaining shareholder to appoint a director, but a company's own articles may have been amended, so they need reading rather than assuming. Until that is resolved, the bank will usually freeze the company account, and suppliers will not be paid even where the money exists.

Two related pots of money get overlooked at this point. If he had lent money into the business, the company may owe the estate rather than the other way round, which is set out in what happens when the director's loan account was in credit. And if the company banked with an overdraft or a business loan, check whether the family home was pledged as security, because a charge over the house is a far more serious matter than a trade account, as explained in when your home is security for the company overdraft.

If the company stops trading or goes into liquidation, expect the guarantees to be called quickly. Suppliers who have written the company debt off will pursue the guarantor's estate for the same money, and where the guarantee is valid they are entitled to. At that point the estate needs a solicitor rather than a phone call.

Where the money to pay it comes from

Usually the estate pays, and the practical effect is that a business debt eats the money the family was going to live on. If the estate cannot cover everything it may be insolvent, and there are strict rules about the order in which debts are paid, with real personal risk for a representative who pays the wrong creditor first. There is also a limited route by which a court can require a survivor who took a jointly owned property by survivorship to pay over the value of the deceased's share where the estate is insolvent. It is uncommon. It is also the reason an insolvent estate with business debts in it needs proper advice rather than assumptions.

The version of this problem that can be dealt with in advance is the one where guarantees exist and nothing has been set aside against them. Business protection is normally arranged in two forms. Cover written to clear guaranteed borrowing and trade debt if a director dies, so that the guarantee is settled without reaching the family's own assets. And key person cover, paid to the company, to keep it trading through the loss of the person the customers actually dealt with. Neither happens automatically, and both depend on underwriting, so what an insurer will offer turns on health, age and occupation rather than on what anyone expects.

If you are reading this because you have realised your own guarantees are uncovered, you can get life insurance quotes and have an FCA-authorised broker look at the guarantees alongside the personal cover, because the two are almost always arranged separately and rarely add up to the whole picture.

The tools of the trade raise the same question in a smaller form. If the business ran a vehicle on finance, the position overlaps with what happens to a van on finance when the owner dies. If there were cards on the business with extra users on them, the answer is in whether an additional cardholder owes the balance.

Scotland and Northern Ireland

Guarantees bind estates across the United Kingdom, but the machinery around them differs. In Scotland a guarantee is called a cautionary obligation, and it must also be constituted in writing to be enforceable, so the same demand for a copy of the signed page applies. The grant is confirmation rather than probate, the person administering the estate is an executor, and there is a long-standing convention that an executor should not distribute within six months of the death, because creditors who come forward inside that period can still be paid. On an estate with trade guarantees hanging over it, that convention is a protection rather than a delay.

In Northern Ireland the law on guarantees is broadly similar to England and Wales, but probate is granted through the Northern Ireland Courts and Tribunals Service and the estate rules are set out separately. nidirect is the starting point for the local process. Free, independent help exists everywhere in the UK and none of it will sell you anything: MoneyHelper is government-backed, and Citizens Advice deals with debts after a bereavement every day of the week.

The rest of this subject, including who is liable for which kind of borrowing after a death, is set out in our guide to debt, credit and finance after a death.

Frequently asked questions

Do trade credit accounts really carry a personal guarantee?

Very often, yes. The application form for a merchant, wholesaler or supplier account frequently contains a guarantee clause signed by a director, printed in small type immediately above the signature box. Many directors have no memory of signing one, which is why the only reliable step is to ask each supplier for a copy of the original application rather than relying on what anybody remembers.

Can a supplier claim from a director's estate?

If a valid personal guarantee was given, yes. Once the company fails to pay, the supplier can claim the unpaid invoices from the estate as an ordinary creditor. The claim is limited to whatever the guarantee actually covers, so the wording needs reading carefully: some guarantees are capped at a stated amount, and some cover only one named account rather than everything the company ever ordered.

How do we find out which accounts were guaranteed?

List every supplier the business bought from on credit, then write to each one asking whether a personal guarantee is held and, if so, for a copy of it together with the current balance. The company's bookkeeping records, the business bank statements and the accountant's files are the fastest route to that list, and the post arriving now will fill in most of the rest.