You signed a personal guarantee for your company’s bank loan, commercial lease, or supply agreement. Your company is now insolvent. The question that follows — and that we are regularly asked by directors — is: am I personally liable? Can they come after me personally?
The short answer is usually yes — personal guarantees survive company liquidation and allow creditors to pursue the guarantor directly. But the position is more nuanced than that, and guarantors have more options than they may realise.
What Is a Personal Guarantee?
A personal guarantee is a legally binding promise by an individual (the guarantor — almost always a director) to personally repay a company’s debt if the company fails to do so. It is the lender’s, landlord’s, or supplier’s insurance policy against the company’s insolvency.
Personal guarantees are extraordinarily common. If you are a director of a small-to-medium sized company in Queensland, you have almost certainly signed at least one: for the business’s bank overdraft, term loan, equipment finance, commercial lease, or trade account with a major supplier.
What Happens When Your Company Goes Into Liquidation?
When a company enters liquidation (whether through creditors’ voluntary liquidation or court-ordered winding up), the liquidator takes control of the company’s assets and distributes them to creditors. Unsecured creditors typically receive little or nothing. Secured creditors may recover more, but often not in full.
The company’s liquidation does not extinguish a personal guarantee. The company and the guarantor are legally separate parties. A creditor who holds both a claim against the company (proved as a debt in the liquidation) and a personal guarantee from a director can pursue both simultaneously or in sequence.
This means that even while waiting for their dividend from the liquidation, a creditor can issue proceedings against the guarantor personally. The creditor does not need to exhaust its claim against the company before calling on the guarantee — unless the guarantee document specifies otherwise.
Types of Creditors Likely to Call on a Guarantee
In practice, the creditors most likely to actively pursue guarantors are:
- Banks and financial institutions — standard business lending in Australia almost universally requires director guarantees. Banks are sophisticated creditors with dedicated debt recovery teams and will move quickly after a company enters insolvency.
- Commercial landlords — leases for commercial premises routinely require director guarantees. Landlords’ claims may include arrears of rent, outgoings, make-good obligations, and early termination costs.
- The Australian Taxation Office (ATO) — the ATO has specific statutory powers to issue Director Penalty Notices (DPNs), which create direct personal liability for certain company tax debts (principally PAYG withholding and unpaid superannuation guarantee charges) without the need to rely on a guarantee. DPNs are a distinct mechanism from personal guarantees.
- Trade creditors and suppliers — large suppliers often require a personal guarantee before extending significant credit to a company.
- Equipment financiers and lessors — equipment finance and operating lease agreements commonly include director guarantees with exposure to residual values and early termination fees.
Defences Available to Guarantors
Signing a personal guarantee does not necessarily mean the guarantor’s position is hopeless. There are recognised legal defences that, in the right circumstances, may partially or fully discharge a guarantor’s liability.
1. Material Variation of the Principal Contract
A guarantor’s liability is typically limited to the obligations of the company as they existed when the guarantee was signed. If the creditor and the company materially varied the underlying contract without the guarantor’s consent — for example, extending the loan term, increasing the limit, or changing repayment conditions — the guarantor may be discharged from liability, or liability may be reduced to what it would have been under the original terms.
2. Failure to Disclose Material Facts
Where a creditor fails to disclose information that materially affects the guarantor’s risk — and the guarantor would not have signed had they known — there may be grounds to set aside the guarantee in equity. This is a complex area of law and highly fact-specific.
3. Defective Execution
A guarantee must be in writing and properly executed. If the guarantee document was not signed correctly, or if independent legal advice was not obtained in circumstances where the creditor was on notice of potential undue influence, the guarantee may be vulnerable to challenge.
4. Release or Discharge
Check whether you were released from the guarantee at any point — for example, when you resigned as a director, or when another director was added to the guarantee. Some guarantee documents automatically release a guarantor upon departure from the company; others do not. Review the guarantee document carefully.
5. Limitation of Liability
Many guarantee documents cap the guarantor’s liability at a specified dollar amount. If the creditor’s claim exceeds that cap, the guarantor’s exposure is limited. Always check the guarantee for any stated limit on liability.
6. Limitation Period
The limitation period for actions on a guarantee in Queensland is generally six years from the date the cause of action arose (i.e., when the company defaulted on the obligation). A creditor who waits too long to commence proceedings may be time-barred.
Negotiating With Creditors After Company Liquidation
In practice, many guarantee calls are settled by negotiation rather than litigation. Creditors — particularly banks — often prefer a negotiated payment arrangement with a guarantor over the time and cost of court proceedings.
Options that may be available include:
- Lump-sum settlement at a discount: Creditors (particularly when a company has already entered liquidation) may accept a lump sum that is less than the full guaranteed amount to avoid the cost and delay of proceedings. The negotiation leverage depends on your personal financial position, the strength of any defences, and the creditor’s internal policies.
- Instalment arrangement: If a full lump sum is not available, some creditors will agree to a structured repayment plan.
- Voluntary bankruptcy: In extreme cases, a guarantor with no realistic capacity to repay a large guarantee may consider voluntary bankruptcy. This is a serious step with significant personal and professional consequences and should only be considered after obtaining comprehensive legal advice.
A solicitor with commercial litigation and insolvency experience can assess the strength of any defences, advise on negotiation strategy, and represent you in dealings with creditors before they commence formal proceedings.
Practical Steps for Directors Facing a Guarantee Call
- Locate and review all guarantee documents you have signed. Check the scope of each guarantee, any stated limit on liability, and whether any release provisions may apply.
- Do not ignore correspondence from creditors. Early engagement — even before litigation begins — creates more room to negotiate.
- Assess your personal financial position. Creditors will do this before deciding how aggressively to pursue you. Knowing your position helps you negotiate realistically.
- Seek legal advice immediately. The earlier you understand your defences and options, the more leverage you have. Waiting until proceedings have been issued narrows your options significantly.
- Consider whether any guarantees may be defective (execution issues, material variations, non-disclosure). Only a legal review of the specific documents can assess this.
Frequently Asked Questions
Can a creditor sue me personally even while my company is in liquidation?
Yes. A creditor who holds a personal guarantee can commence proceedings against the guarantor at any time after the company defaults — including while the company is in liquidation. There is no requirement to wait for the liquidation to complete.
Does the ATO need a guarantee to pursue me personally?
No. The ATO has separate statutory powers to issue Director Penalty Notices (DPNs) for unpaid PAYG withholding and superannuation guarantee charges. DPN liability arises by operation of law, not by virtue of a signed guarantee. DPNs are a distinct and significant risk for directors of companies in financial difficulty.
Can I be released from a personal guarantee?
Possibly — depending on the terms of the guarantee document and the circumstances. Some guarantees provide for automatic release upon ceasing to be a director; others do not. Release can also be negotiated with the creditor, though creditors are under no obligation to release a guarantor. A solicitor can review the guarantee document and advise on any release provisions.
Can Boss Lawyers help if I’m facing a guarantee call?
Yes. Boss Lawyers regularly advises directors and guarantors on their rights and options when a company enters insolvency and guarantee calls are made. We review guarantee documents, identify defences, and negotiate with creditors on your behalf. Call 1300 267 711 for a confidential discussion.
If your company is in financial difficulty or has entered insolvency, and you are facing calls on personal guarantees, take legal advice now. Boss Lawyers’ experienced team advises commercial litigation and insolvency matters across Brisbane and Queensland.
Call 1300 267 711 to speak with Mark Harley, Principal Solicitor.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Mark Harley
Principal Solicitor, Boss Lawyers
17+ years experience in insolvency, commercial litigation, and director advisory
