Personal Guarantees in Commercial Lending Queensland: What Guarantors Must Know Before They Sign (and After)

A personal guarantee in a commercial loan makes you personally liable for the borrower’s debt if the borrower defaults. In Queensland, a guarantee must be in writing and signed under s 59 of the Property Law Act 1974 (Qld). If you are a director or shareholder being asked to sign one, you are agreeing to put your personal assets on the line for the company’s obligations. That exposure does not disappear when the company winds up.

What Is a Personal Guarantee in Commercial Lending?

A personal guarantee is a legally binding promise by an individual, the guarantor, to meet the financial obligations of another party (the principal debtor, usually a company) if that party fails to do so. In a commercial lending context, the lender is typically a bank, non bank financial institution, or trade creditor; the borrower is the business entity; and the guarantor is the director, shareholder, or associated person the lender requires to stand behind the debt.

Under Queensland law, a guarantee is a special kind of contract. Section 59 of the Property Law Act 1974 (Qld) requires that any guarantee, or any promise to answer for the debt, default, or miscarriage of another person, must be in writing and must be signed by the guarantor or by a person authorised to sign on the guarantor’s behalf. An oral guarantee is unenforceable in Queensland, regardless of what was agreed in conversation.

This formality requirement does not protect guarantors from onerous terms. It simply means there must be a document. And that document is almost always drafted by the lender’s lawyers, not yours.

Where the lender registers a security interest (for example, a mortgage over the guarantor’s home, or a charge over assets), registration under the Personal Property Securities Act 2009 (Cth) (PPSA) may also be required to perfect the lender’s priority position. Section 8 of the PPSA defines what constitutes a “security interest” for registration purposes. If the guarantee is supported by a general security agreement, that security interest should be registered on the Personal Property Securities Register within the required timeframe or the lender risks losing priority to other secured creditors.

Why Lenders Require Personal Guarantees from Directors

Commercial lenders require personal guarantees because companies are separate legal entities. If a company defaults and has no assets, the lender’s only recourse is against the company, unless someone has agreed to be personally liable. The guarantee bridges that gap.

From a lender’s perspective, the guarantee serves two functions. First, it creates a secondary source of repayment: if the company cannot pay, the guarantor must. Second, it aligns the director’s or shareholder’s personal financial interests with the success of the business. A director who has guaranteed the company’s debt has a powerful incentive not to run the company recklessly.

Banks and lenders outside the banking sector in Queensland routinely require personal guarantees from directors who hold more than 25 percent of shares in a borrowing company, and sometimes from all directors regardless of shareholding. The Australian Banking Association’s Banking Code of Practice (BCOP) imposes obligations on banks that limit some of the most oppressive guarantee practices, but those obligations apply only to BCOP signatories, and they do not apply to lenders outside the banking sector at all.

What You Are Actually Agreeing To: Key Clauses

Most guarantors have no idea what their guarantee actually says. Here is what the standard commercial lending guarantee typically contains.

Joint and Several Liability

Where two or more people guarantee the same debt, for example, two directors of the same company, the guarantee will almost certainly impose joint and several liability. This means the lender can sue any one guarantor for the entire amount of the debt. The lender does not have to divide the claim between guarantors, pursue them equally, or even notify one guarantor before suing another.

If you pay the full debt as guarantor, you have a right of contribution against your the other guarantors for their proportionate share. But that right is between you and your the other guarantors, the lender is not involved in that dispute, and the lender is not obliged to assist you recover it.

The All Monies Clause

The most dangerous clause in a commercial guarantee is the all monies clause. Standard lending documentation does not limit your guarantee to the specific loan that brought you to the table. Instead, the guarantee covers “all amounts” that the borrower owes or will owe to the lender under any facility, now or in the future.

What does this mean in practice? You sign a guarantee for a $500,000 equipment loan. Two years later, the company takes out a $1.2 million working capital facility with the same bank. You did not sign anything for that second loan, but if the all monies clause applies, your guarantee covers it too. When the company defaults on the working capital facility, the bank pursues you for $1.2 million.

All monies clauses are routinely upheld by Queensland courts. They are enforceable even where the guarantor was unaware of the subsequent facility, provided the guarantee document is clear on its face. Before signing any guarantee, ask your solicitor to confirm whether the clause is limited in scope or unlimited.

Negative Pledge

Many commercial guarantees, particularly those given to banks, include a negative pledge clause. This prevents you, as guarantor, from creating any security interest over your personal assets (such as a mortgage over your home to a different lender) without the lender’s prior written consent. Breach of a negative pledge is typically an event of default under the guarantee, allowing the lender to demand the full amount immediately.

On Demand Obligations

A guarantee may be structured as a “see to it” obligation (where the guarantor ensures the debtor performs) or as an “on demand” obligation (where the guarantor pays on demand without waiting for the creditor to exhaust remedies against the debtor). On demand guarantees, sometimes called performance bonds, are immediately enforceable on the lender’s written demand. You do not get to argue about whether the company actually owed the money until after you have paid.

Whether a guarantee is on demand or conditional depends on the specific drafting. If it says “pay on demand” or “pay immediately upon written request,” it is almost certainly an on demand guarantee. Courts have consistently enforced these clauses strictly.

When Can a Guarantee Be Challenged or Set Aside?

Guarantees are not bulletproof. There are several recognised grounds on which a guarantor can challenge or seek to set aside a guarantee in Queensland.

Non Est Factum

Non est factum, Latin for “it is not my deed”, applies where the guarantor signed a document that was fundamentally different from what they believed they were signing, and the error was not the result of their own carelessness. It is a narrow defence. The guarantor must show both the radical difference between what was signed and what was understood, and that they exercised all reasonable care in signing. Courts apply this defence cautiously.

Misrepresentation

Where the lender, borrower, or another person made a false representation that induced the guarantor to sign, the guarantee may be voidable. This includes innocent misrepresentation, it does not require fraud. If a director was told by the bank that the facility was limited to $300,000 when in fact the all monies clause applied to all facilities up to $2 million, that misrepresentation may vitiate consent.

Unconscionable Conduct

Section 20 of the Australian Consumer Law (ACL) (schedule 2 to the Competition and Consumer Act 2010 (Cth)) prohibits unconscionable conduct in trade or commerce. Section 21 ACL extends this to business transactions. Section 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) applies an equivalent prohibition to financial services. These provisions are particularly relevant to guarantees obtained from vulnerable or unsophisticated guarantors.

The seminal Queensland case on unconscionability and guarantees is Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, decided by the High Court. In Amadio, a guarantee signed by elderly parents who had a poor understanding of the document and were not advised of material facts by the bank was set aside as unconscionable. The principle, that equity will intervene where one party takes advantage of the other’s special disadvantage, remains good law today and applies directly to commercial guarantees in Queensland.

Undue Influence

Undue influence arises where a guarantor’s consent was not freely given, where pressure, emotional manipulation, or a relationship of dominance caused the guarantor to sign against their real interests. Spouses or domestic partners who guarantee a business partner’s debts under pressure are the most common examples. Courts have set aside guarantees on this basis, particularly where the guarantor did not receive independent legal advice and the lender had reason to know of the influence being exerted.

Variation of Loan Terms Without Consent

This is one of the most important and most overlooked defences. If the lender and borrower vary the principal loan agreement without the guarantor’s consent, for example, by extending the loan term, increasing the credit limit, or changing the interest rate, the guarantor may be discharged from the guarantee in whole or in part.

The principle is drawn from the rule in Wythes v Labouchere (1859) 3 De G and J 593, affirmed in Australian law: a guarantor is a surety and is entitled to hold the lender strictly to the terms of the transaction they agreed to guarantee. If those terms change materially without the guarantor’s consent, the guarantee may not extend to the varied obligation.

Modern commercial guarantee documents typically include a clause allowing variation without discharging the guarantee. Whether such a clause is effective depends on its precise drafting and whether the guarantor received adequate disclosure.

The Banking Code of Practice: What Banks Must Do

If your lender is a bank that has adopted the Banking Code of Practice (BCOP), which includes all major Australian banks, specific obligations apply before a guarantee can be taken. These are protections that many guarantors do not know they have.

Under the BCOP, banks must:

• Inform the proposed guarantor before they sign that they should obtain independent legal and financial advice;
• Give the guarantor a copy of the loan documents (including the loan agreement and any security documents) before they are asked to sign the guarantee;
• Not accept a guarantee from a person who the bank knows is under undue influence, or where there are clear indicators of that risk;
• Give the guarantor at least three business days to consider the documents before signing (in most cases);
• Notify the guarantor if the borrower’s loan falls into default (certain conditions apply).

These obligations do not apply to lenders outside the banking sector. If you borrowed from a finance company, a peer to peer lender, a trade creditor, or a private investor, the BCOP does not apply to your guarantee. That is a significant gap in protection, and it is why independent legal advice before signing any commercial guarantee is essential, not optional.

Guarantor Rights: Subrogation and Contribution

As a guarantor who has paid a debt, you do not simply absorb the loss. You have two important legal rights.

Right of subrogation: Once you have paid the guaranteed debt in full, you are subrogated to the lender’s position. This means you step into the lender’s shoes and inherit all the rights the lender had against the borrower: rights under the loan agreement, rights under any security, and rights to pursue the principal debtor for repayment. If the lender held a mortgage over company assets that was not fully applied, you may be entitled to enforce that mortgage.

Right of contribution: Where there are the other guarantors and you have paid more than your proportionate share of the debt, you can seek contribution from each fellow guarantor for their proportionate share. The right of contribution arises by operation of law. It does not require a written agreement between the other guarantors. However, if a fellow guarantor is also insolvent or has no assets, this right may have limited practical value.

When the Borrower Becomes Insolvent: Guarantor Exposure

A critical misconception among directors is that a personal guarantee “goes away” when the company is wound up or enters voluntary administration. It does not. A guarantee is an independent obligation, it is a separate contract between you and the lender, not a contract between the lender and the company. The company’s insolvency does not release you from your guarantee.

When the company enters voluntary administration or liquidation, the lender may make an immediate demand on the guarantor without waiting for the administration or liquidation to conclude. The lender does not need to exhaust its claims against the company first, unless the guarantee specifically requires this (and most do not).

If the lender has lodged a proof of debt with the liquidator and also holds a guarantee, the lender cannot recover more than the total debt from all sources combined. But until that total is recovered, each avenue of recovery, including the guarantee, remains open.

Directors need to understand this clearly: the moment you sign a personal guarantee, your personal exposure to that debt is real and enforceable from that day forward, regardless of what happens to the company. If you are a director and your company is in financial difficulty, obtaining advice about your guarantee exposure is not optional. The earlier you act, the more options you have. We explain this in more detail at our post on what happens to a personal guarantee when your company fails.

Director Guarantee vs Shareholder Guarantee

There is a practical difference between a director guarantee and a shareholder guarantee, though both create the same legal obligation. A director guarantee is typically required as a condition of the borrowing because the director controls the company and the lender wants that control aligned with repayment. A shareholder guarantee may be required where a shareholder who is not also a director has significant assets or where the lender wants all persons with an economic interest in the company to bear personal risk.

Where a person is both a director and a shareholder, they may be asked to sign in both capacities, but this does not increase the amount of their liability unless the guarantee instruments separately define different obligations. The guarantee deed will govern what you owe.

When Does a Personal Guarantee End?

A guarantee ends when:

• The guaranteed debt is paid in full and the lender formally releases the guarantee;
• The lender agrees in writing to release the guarantor (a release must be in writing and signed by the lender to be enforceable);
• The guarantee is set aside by a court;
• The limitation period expires, typically six years from the date of the guarantor’s default under the Limitation of Actions Act 1974 (Qld) s 10(1)(a);
• The principal debtor’s obligations are discharged by novation or substitution with the lender’s agreement; or
• The lender has so fundamentally varied the principal obligation, without consent, that the guarantee no longer covers the varied debt.

A guarantee does NOT end when you resign as director. A guarantee does NOT end when you sell your shares. A guarantee does NOT end because the company has been deregistered. Unless the lender releases you in writing, your guarantee obligation survives all of these events.

What to Do If You Receive a Demand Under a Personal Guarantee

This is the section that matters if you are reading this at 11pm after opening a letter from a bank’s solicitors. Here is what you need to know right now.

Do not pay without obtaining legal advice first. Paying a demand can be treated as an admission of the full liability claimed. It may also extinguish defences you did not know you had, including the variation defence, the all monies clause scope question, or a misrepresentation claim against the lender. Payment is not the fastest way out. It may be the most expensive.

When you receive a demand, the steps are:

1. Read the demand carefully. Confirm: who is demanding payment; what amount is claimed; under what guarantee document; what the deadline for payment is; and whether the demand references a specific account or facility.
2. Locate your copy of the guarantee document. You should have been given a copy when you signed. If you do not have a copy, request it from the lender immediately, in writing.
3. Do not ignore the deadline. A failure to respond may trigger further legal proceedings, including a statement of claim in the District or Supreme Court of Queensland, or a bankruptcy notice if the demand is from a judgment creditor.
4. Do not engage directly with the lender’s solicitors without your own legal advice. Anything you say or write can be used against you. Written admissions are particularly dangerous.
5. Obtain independent legal advice as early as possible. A solicitor acting for you can identify available defences, negotiate a settlement, challenge the quantum of the claim, or raise procedural issues with the demand, all before a court proceeding is commenced.
6. Consider whether the lender has security. If the lender also has a mortgage over property or a security agreement over assets, understand the relationship between that security and the guarantee. The lender may be required to apply the security before pursuing the guarantor personally, depending on the guarantee terms.

If you are a creditor who holds a personal guarantee and needs to enforce it, we cover that process in detail in our post on enforcing a personal guarantee in Queensland.

Directors facing a guarantee demand in the context of a company that is already in financial difficulty should also read our guidance on commercial litigation in Queensland and debt recovery, understanding the lender’s enforcement tools is important context for any negotiation.

Frequently Asked Questions

Can a lender pursue me under a personal guarantee while my company is still trading?

Yes, if the company has defaulted under the loan agreement. Most commercial guarantees allow the lender to call on the guarantee upon any event of default by the borrower, including a missed repayment, a breach of a financial covenant, or the appointment of an administrator. The lender does not have to wait for the company to be wound up. If the guarantee is structured as an on demand obligation, the lender can demand payment immediately upon notice of default, even while the company continues to trade.

I resigned as director six months ago. Does my personal guarantee still apply?

Almost certainly yes. Resignation as director does not release you from a personal guarantee you have already signed. The guarantee is a contract between you and the lender. That contract is only extinguished by repayment of the debt, a formal written release from the lender, or a court order. Resigning from your directorship is not any of those things. If you have signed a guarantee and resigned from the company, contact the lender’s relationship manager and ask for a formal deed of release, but the lender is not obliged to provide one, and will typically refuse to do so unless an alternative guarantor is substituted or the debt is otherwise secured.

Can I limit my personal guarantee to a specific amount?

Yes, if you negotiate this before signing. A capped guarantee limits your exposure to a defined dollar amount, regardless of how much the company owes. A limited guarantee limits your exposure to a specific facility or account rather than all monies. These are commercially reasonable positions that some lenders will accept, particularly for smaller facilities or where the director has limited personal assets. The time to negotiate the scope of a guarantee is before you sign it. Once signed, the terms are binding and amendment requires a fresh agreement with the lender.

What does “all monies” mean in a personal guarantee?

An all monies clause means your guarantee covers every debt the borrower owes to the lender, not just the original loan. This includes existing facilities, future facilities, credit cards, overdrafts, interest, default interest, legal costs, and any other amounts that become owing during the term of the guarantee. You may have signed a guarantee for a $600,000 term loan; if the company later took out a $400,000 overdraft with the same bank, your all monies guarantee covers the overdraft too. Always ask your solicitor to confirm whether the guarantee you are being asked to sign includes an all monies clause.

Does the Banking Code of Practice protect me if I sign a guarantee with a lender outside the banking sector?

No. The Banking Code of Practice applies only to banks that have adopted it, these are regulated deposit taking institutions under the Banking Act 1959 (Cth) and members of the Australian Banking Association. Lenders outside the banking sector (including finance companies, private credit funds, equipment financiers, and peer to peer lenders) are not subject to the BCOP. For lending outside the banking sector, your only statutory protections are the general consumer and credit legislation, principally the National Credit Code (if the loan is regulated credit) and the unconscionable conduct provisions in the ACL and ASIC Act. Many commercial loans are excluded from the National Credit Code, so those protections may not apply either. Independent legal advice before signing is the only reliable protection.

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Boss Lawyers offers a fixed fee director advisory session (2 hours) for directors facing guarantee demands and commercial lending disputes. If you need to understand your exposure before responding to a demand, contact Mark Harley at 1300 267 711 or via bosslawyers.com.au for a clear cost before you start.

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Related services: commercial litigation lawyers.

This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.

Mark Harley is the Principal Solicitor of Boss Lawyers Pty Ltd (ACN 143 136 645), Brisbane CBD, 32 Turbot Street, Brisbane QLD 4000. Phone 1300 267 711.