A personal guarantee is one of the most significant legal commitments a director can make. You sign on behalf of your company every day — but a personal guarantee puts your own assets on the line. Your house. Your savings. Your financial future.
Despite this, directors routinely sign personal guarantees without properly understanding what they are signing, when the guarantee will be called on, or what protections (if any) are available to them. This guide explains everything a director needs to know before signing a personal guarantee — and what to do if a guarantee has already been called upon.
What Is a Personal Guarantee?
A personal guarantee is a legally binding promise by an individual (the guarantor — usually a director) to satisfy the obligations of another party (the principal debtor — usually the company) if that party fails to perform. In commercial lending and credit arrangements, a personal guarantee is typically required by banks, financiers, and trade creditors as a condition of extending credit to a company.
The legal effect is stark: if your company cannot pay, you must pay. The creditor does not need to exhaust remedies against the company before coming for you personally. Many guarantees are “on demand” — meaning the creditor simply needs to demand payment, and your obligation to pay crystallises immediately.
Why Do Directors Give Personal Guarantees?
Directors give personal guarantees because creditors — particularly banks and financiers — require them as a condition of providing credit. The commercial reality is that a limited liability company provides no personal recourse to a creditor if the company fails. A personal guarantee removes that protection from the company’s directors.
Common situations in which a director is asked to provide a personal guarantee include:
- Bank loans and overdraft facilities — virtually all commercial lending to SMEs requires a director guarantee
- Commercial leases — landlords routinely require director guarantees as a condition of granting a lease to a company
- Trade credit accounts — suppliers providing credit to businesses often require a director guarantee, particularly for new relationships or higher credit limits
- Equipment finance and hire purchase — finance companies providing asset finance to companies commonly require director guarantees
- Franchise agreements — franchisors typically require director guarantees from the franchisee company’s principals
Types of Personal Guarantees
Not all personal guarantees work the same way. The specific terms of the guarantee document determine the scope of your liability. Key distinctions include:
Unlimited vs Limited Guarantees
An unlimited guarantee exposes you to the entire debt owed by the company to the creditor, with no cap on your personal liability. An limited guarantee caps your exposure at a specified dollar amount. Always negotiate for a limit — and always check what the limit actually covers (some “limited” guarantees are limited to principal only, with interest and costs additional).
Continuing vs Specific Guarantees
A continuing guarantee covers all present and future liabilities of the company to the creditor — including debts that do not yet exist when you sign. This means a guarantee you signed five years ago for a bank overdraft may cover a new loan facility entered into this year. A specific guarantee covers only identified obligations — typically a specified loan or lease.
Joint vs Several Liability
Where multiple directors guarantee the same debt, the guarantee may impose liability jointly (you can only be sued together with the other guarantors), severally (each guarantor can be pursued individually for the full amount), or jointly and severally (both — the creditor can pursue any guarantor for the full amount). Joint and several liability is the norm in commercial guarantees. This means that if you are the only solvent guarantor, you can be pursued for the entire debt even if other co-directors also signed.
“All Monies” Clauses
Many bank guarantees contain an “all monies” clause — guaranteeing all money the company owes to the bank at any time, from any source. This can extend far beyond the specific loan or facility you had in mind when you signed. Read these clauses carefully.
When Can a Creditor Call on a Personal Guarantee?
A personal guarantee can be called upon when the principal debtor (your company) defaults on its obligations to the creditor. “Default” typically includes:
- Failure to make a scheduled repayment
- The company being placed in external administration (voluntary administration, receivership, liquidation)
- A material adverse change in the company’s financial position
- Breach of any other covenant or condition in the underlying agreement
The creditor does not generally need to exhaust remedies against the company before calling on your guarantee — unless the guarantee specifically says otherwise (a “see-to-it” guarantee). Most commercial guarantees are indemnities as well as guarantees, which means the creditor can come directly to you without first pursuing the company.
What Happens to a Personal Guarantee if the Company Goes Into Liquidation?
Liquidation of the company does not discharge a personal guarantee — it typically triggers it. When a company goes into voluntary administration or liquidation, creditors who hold personal guarantees will commonly move quickly to call upon those guarantees, particularly where they assess that recovery from the company will be limited.
This is one of the most confronting situations a director can face: the company has failed, and now creditors are pursuing you personally. At this point, your personal financial position becomes critical. You need to understand:
- What debts are covered by guarantees you have signed
- Whether any defences are available to you
- What assets are available to creditors if judgments are obtained against you
- Whether your own personal insolvency is a risk and what the consequences would be
Getting legal advice immediately is critical. Do not wait until judgment is entered before seeking help.
Defences Available to a Guarantor
A personal guarantee is not always enforceable as written. Depending on the circumstances, a guarantor may have defences including:
Non-Disclosure and Misrepresentation
If the creditor made material misrepresentations to you about the nature of the guarantee, or failed to disclose material information about the principal debtor’s financial position, you may have grounds to challenge enforceability under the general law or under the Australian Consumer Law.
Unconscionable Conduct
Courts have set aside guarantees where the creditor engaged in unconscionable conduct in procuring the guarantee — for example, where a spouse or family member was pressured to sign a guarantee by a bank that knew they did not understand the nature or effect of the document.
Variation or Discharge by Creditor Conduct
A guarantor may be discharged from liability if the creditor, without the guarantor’s consent, varies the underlying agreement in a way that increases the guarantor’s risk, or gives the principal debtor time to pay without reserving rights against the guarantor. Many modern guarantees contain “preservation of rights” clauses specifically designed to prevent this defence, so check the document carefully.
Failure to Give Notice
Some guarantees require the creditor to give notice before calling on the guarantee. If notice was not given as required, enforceability may be challenged — although many guarantees expressly waive notice requirements.
The Debt Is Not Owed
A guarantor’s liability is co-extensive with the principal debtor’s liability. If the company has a valid defence to the debt — for example, the goods or services were not provided, or the creditor is in breach of the underlying contract — the guarantor may be entitled to raise that same defence.
Protecting Yourself Before You Sign
Prevention is far better than cure. Before signing any personal guarantee, take these steps:
- Read the document in full — Do not sign without reading every clause. If you do not understand something, ask for an explanation or get legal advice.
- Understand the scope — Is it unlimited or limited? Continuing or specific? All monies or restricted to a specific debt? The answers determine the extent of your exposure.
- Negotiate the terms — Guarantees are often presented as non-negotiable, but many terms can be negotiated. Push for a dollar cap, a time limit, a requirement that the creditor exhaust remedies against the company first, and a release mechanism if you leave the company.
- Get independent legal advice — This is not optional. The cost of one hour of legal advice is trivial compared to the potential consequences of signing a guarantee you do not understand.
- Understand the company’s financial position — The guarantee only matters if the company defaults. How likely is that? What would the company need to owe at the time of default?
- Consider asset protection strategies — Legal asset protection strategies (structuring ownership of assets appropriately, superannuation contributions) may be available before you sign. Once a guarantee is called on, it is too late. Get advice from both a lawyer and an accountant.
Director Penalty Notices: A Related Risk
Personal guarantees are not the only way directors face personal liability for company debts. The ATO can issue Director Penalty Notices (DPNs) making directors personally liable for unpaid PAYG withholding, superannuation guarantee charge, and GST. DPNs operate independently of any personal guarantee and can result in significant personal liability if the company defaults on its tax obligations.
Directors facing both a called personal guarantee and potential DPN liability need comprehensive legal advice covering both exposures simultaneously. The strategies available — including voluntary administration and the safe harbour provisions — need to be assessed in light of both.
How Boss Lawyers Can Help
Boss Lawyers regularly acts for directors who have given personal guarantees and are now facing demands from creditors. We also advise directors who are about to sign guarantees and want to understand their exposure and options.
Our experience in corporate insolvency and commercial litigation means we understand both the legal and practical dimensions of personal guarantee disputes. Whether you need advice on a guarantee you are being asked to sign, a strategy for responding to a guarantee demand, or representation in litigation brought by a creditor, we can help.
Contact Boss Lawyers on 1300 267 711 or use our online contact form.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances before taking any action in relation to a personal guarantee.
