Employee Directors could become vicariously responsible for company loans.

To be designated as a director in a company is a great feeling and does good to ones ego too. But some employees who are designated as directors becomes guarantors to the loans taken by the company and end up virtually as criminals on the run.

Banks require borrowers to sign a sheaf of papers before the actual disbursal of the loan amount. If the borrower is a company the papers are to be signed by the directors. Not all those who sign the papers are owners – share holder directors in the company. There would be some employees who are designated as directors and who too would be singing the papers. These are called as employee directors. Some times, wittingly or unwittingly these employee directors become guarantors for the company loans having implications beyond their imaginations.

When signing papers in the Bank, most employee directors sign without pausing to go through the fine print. Some of them willingly act as guarantors and a few of them even go to the extent of depositing title deeds of their personal properties as collateral guarantee for the loans. What ever may be back ground in which the papers come to be signed, such employee-directors have personal liability for repayment of the entire loan amount, irrespective of the fact whether they are in service of the company or not at the material time. The liability of such directors has always remained a bone of contention between them and the Bankers, and, between the Company (the principle borrower) and the current directors.

In the eye of the law, such employee directors are “guarantors” on par with any other guarantor. The bank on its part argues that it had lend money believing on the submissions made by the employee director as to the functioning of the company. Having agreed to stand guarantee for the due payment of the loan taken the employee director has to make good his commitment- irrespective of his status in the company. The Debts Recovery Tribunals and the various other Courts have endorsed this view.

Given the current economic scenario and enforcement of Bassel-II accounting norms by the Banks, the employee – directors should take some elementary precautions before signing loan papers for and on behalf of the company.

First thing that they should do is to make up their mind as to what kind of guarantee that they are offering. If they are standing guarantee for reaching productions targets, turnovers, cash flows then they must work out some sort of under taking from the company or co-directors and other stake holders to protect their interests. It is best to enter into counter guarantees and other reverse agreements so that if some thing goes wrong the employee director doesn’t become saddled with the loan and others walk away freely.

The best thing would be to be a little prudent before signing any papers. Nothing can be better than taking legal advice. Even if the director happens to be a legal man himself, still it would be better to have an opinion of an unconnected legal person. A dispassionate third party trained eye can always discover and anticipate things which an involved person may not be able to detect.

The first and foremost precaution that should be taken is to limit the loan liability. While signing the documents the liability of the employee directors should be stipulated in fixed amounts. This is generally as salary for some months. If the amount is not fixed it may lead to multiplicity of problems.

The second precaution that the employee –director can take is get reverse guarantees. This can be done by getting guarantees from other stake holders who could be owners and share holders in the company but not necessarily directors. The employee director can enforce these reverse guarantees if some thing goes wrong.

The third precaution that the employee director can take is to stipulate certain clauses in the guarantee deed itself. If properly presented, and supported by other directors, the banks are not averse to re-draft or amend the guarantee deed to suit a particular director. According to these clauses, the loan account should be frozen on the occurrence of certain events. One of the event could be his resignation, removal, dismissal or occurrence of such similar events.

This will atleast limit his liability in terms of amount, time and scope of the dispute for which he could be liable for. If the concerns of the employee directors regarding scope of liability is not addressed to then it is not worth working for such companies – no matter what designation you may be conferred with.

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