Director’s guarantees are commonly seen in commercial contracts where one party is a company and the director(s) of the company give a personal guarantee.
Often, the personal guarantee is not explicit in the contract documentation, particularly in the case of a director’s guarantee in a commercial contact.
Signing a personal guarantee is a serious commitment and the decision to do so should not be taken lightly.
What is a personal guarantee?
A personal guarantee is a contractual promise by the guarantor to accept liability for another party who owes an obligation to the ‘beneficiary’ of the guarantee. This typically means that if the company fails to make payment to the beneficiary, the guarantor is obligated to make payment or performance of the company’s debt or obligation.
Classic examples include, for example:
- A company director guarantees the repayment of a loan advanced by a financier to the company.
- A company director guarantees the company’s obligations under a commercial lease.
- A director signs a guarantee in a credit application with a supplier, under which the director is guaranteeing the due repayment of monies owed by the company to the supplier.
How do I identify a director’s guarantee?
There are several ways to identify a director’s guarantee. The below are indicative only, are not exhaustive, and should serve as ‘red flags’:
- You are required to sign personally under your own name. If the contract you are signing has a separate signature line for yourself (separate to the company/business) this is a sign there may be a guarantee hidden in the document.
- There is a term or condition with the heading “Guarantee” or “Guarantee and Indemnity”. If you see a heading like this in any part of the contract terms, this is a sign you need to scrutinise the document to verify whether you are providing a personal guarantee.
- You are personally named as a party to the contract. If you are personally named as a party to the contract, rather than just your company alone, this also suggests that you are either guaranteeing the company’s obligations, or perhaps even principally responsible for the contract obligations.
Who may ask you to sign a personal guarantee?
It is common for a supplier or a lender to reject business with you unless you sign their credit agreement. Credit agreements usually include terms on a personal promise or guarantee that you are required to meet if your company is unable to pay the debt. It is crucial that you read the agreement carefully as some agreements do not clearly advise that you are signing a personal guarantee.
If you trade through a company, you may be asked to sign a personal guarantee when you:
- sign a lease or rental agreement;
- apply for a trade credit from a supplier;
- sign a loan agreement with a bank or other lender; or
- sign a lease or finance agreement for a motor vehicle or other equipment.
Your liability under the guarantee
The company has the primary liability for the obligations guaranteed by the guarantor. On the other hand, the guarantor has an ancillary or secondary liability which is only enlivened when the primary company fails to perform the guaranteed obligations.
Limited personal guarantee
A limited personal guarantee means that if the company defaults, you are only liable to share the burden of repayment up to a certain amount and the burden cannot exceed it. An example is where you personally guarantee your company as a director with a limit up to $250,000.00. The beneficiary therefore cannot claim more than $250,000.00 if the company defaults. If you need to sign a personal guarantee for commercial reasons, it may be possible to negotiate a limit to your exposure.
Risks associated with signing a personal guarantee
There are several risks associated with signing a personal guarantee. A few of the important risks include the following:
- the beneficiary of the guarantee can pursue you for the debt if your company defaults, exposing your personally assets (such as the family home);
- the beneficiary can enforce the guarantee against you without first being required to claim against the company;
- some guarantees go a step further by putting a charge over your personal assets, such as real estate, allowing the beneficiary to exercise that security in various ways to obtain possession of your personal assets;
- there is generally no time limit for how long a personal guarantee can run for. It is a continuing liability that will only be discharged once all obligations and liabilities of the company are fulfilled; and
- even if you resign as a director of the company you will typically continue as guarantor.
What to do when presented with a personal guarantee
If you are presented with a personal guarantee, consider doing the following:
- understand the contract by taking the time to evaluate each aspect of the contract and any included terms and agreements before signing. This involves negotiating terms until you are satisfied and placing a firm limit on any personal guarantee you provide;
- seek legal advice to break down the terms of the contract and ensure the guarantee is enforceable;
- consider personal guarantee insurance to help protect your assets in the event that your personal guarantees are enforced;
- evaluate your financial position; and
- if you choose to sign the guarantee, keep a copy of the signed guarantee for your records, in the event you need to assess your personal exposure in future;
If you are entering into a personal guarantee or want advice regarding how a personal guarantee may affect you if enforced, contact our commercial team today. We are happy to assist by taking you through the personal guarantee and discussing any exposure you may face from it.
Daniel Dash, Senior Associate
Daniel is part of the commercial law team at NB Lawyers – lawyers for employers working with individuals and business owners on a range of matters including business sales, buisness structuring, commercial contracts, corporations law, litigation, franchise law, intellectual law and taxation.