Your company owes the money. But could creditors come after your personal assets?
Many Australian business owners establish companies to separate their personal finances from business liabilities. However, signing a personal guarantee can put that protection at risk.
Whether you are entering a commercial lease, securing business finance or opening a supplier account, a personal guarantee could leave you responsible for debts your company cannot repay.
The biggest risk? Your liability may continue even after the business closes.
What Is a Personal Guarantee?
A personal guarantee is a legally binding commitment by an individual, often a company director or business owner, to be responsible for specified business obligations if the company fails to meet them.
Generally, a company is a separate legal entity responsible for its own debts. However, a personal guarantee creates a separate obligation that creditors may enforce against the guarantor.
This means operating through a Pty Ltd company does not necessarily protect your personal finances from debts you have guaranteed.
Where Are Personal Guarantees Commonly Found?
Personal guarantees frequently appear in everyday commercial agreements, including:
- Commercial leases: Landlords may require directors to personally guarantee rent, outgoings and other obligations under a business lease.
- Business loans: Banks and lenders may require personal guarantees and security over personal assets, potentially including a family home.
- Supplier agreements: Suppliers providing goods or services on credit may require business owners to guarantee outstanding invoices.
- Equipment finance: Finance providers may seek personal guarantees to support repayment and other contractual obligations.
These provisions can be overlooked when signing standard agreements or credit applications, particularly where the guarantee appears within lengthy terms and conditions.
Guarantees vs Indemnities: What Is the Difference?
A guarantee and an indemnity are not necessarily the same thing.
A guarantee generally involves a promise to answer for another party’s debt or default.
An indemnity, depending on its wording, can create a separate obligation to compensate another party for specified losses or liabilities.
Some agreements contain both provisions, commonly described as a Guarantee and Indemnity.
This distinction matters because an indemnity may allow creditors to pursue recovery in circumstances where an ordinary guarantee could be subject to different limitations or defences.
The precise wording determines the extent of your obligations.
What Happens When the Company Cannot Pay?
If your company defaults on its obligations, a creditor may be entitled to enforce a valid personal guarantee.
Depending on the agreement and applicable law, this could involve:
- Issuing a demand: The creditor seeks payment from the guarantor for an outstanding business debt.
- Commencing legal proceedings: If the debt remains unpaid, the creditor may pursue recovery through the courts.
- Enforcing against personal assets: Following judgment or under valid security arrangements, creditors may seek recovery against eligible personal assets.
- Bankruptcy proceedings: Where the legal requirements are satisfied, an unpaid personal liability could ultimately expose the guarantor to bankruptcy proceedings.
Importantly, a creditor’s enforcement rights depend on the terms of the guarantee, any applicable notice requirements, available defences and relevant laws.
Does Liquidating the Company Cancel Your Personal Guarantee?
No. Company liquidation does not automatically release a personal guarantor from liability.
If a company becomes insolvent and enters liquidation, its creditors may still pursue individuals who have personally guaranteed its debts.
Similarly, resigning as a director, selling the business or closing the company does not necessarily end an existing guarantee.
There may be restrictions on enforcement during certain formal restructuring or administration processes, but these do not automatically extinguish the underlying guarantee.
Before Signing a Personal Guarantee, Check These Five Things
A personal guarantee may be a commercial requirement, but its terms can sometimes be negotiated.
Before signing, consider:
- Liability limits: Is the guarantee capped at a specific amount, or could it cover future debts, interest and enforcement costs?
- Security: Are you offering your home or other personal assets as security?
- Duration: Does the guarantee continue after you resign, sell the business or end the commercial relationship?
- Release provisions: Can you obtain a written release when the debt is repaid or your involvement ends?
- Enforcement rights: Can the creditor pursue you without first taking recovery action against the company?
Understanding these provisions before signing may prevent significant financial exposure later.
Concerned About Personal Liability? Speak With NB Commercial Law.
A personal guarantee should never be treated as a routine signature. What appears to be a standard commercial requirement could expose you to substantial financial consequences.
NB Commercial Law assists Australian businesses, directors and guarantors with:
- Reviewing and negotiating personal guarantees and indemnities
- Commercial lease, loan and supplier agreement advice
- Assessing personal liability and contractual risks
- Responding to creditor demands and enforcement action
- Commercial debt disputes and litigation
Before you sign a personal guarantee, or if a creditor is already pursuing you, understand your legal position.
Contact NB Commercial Law for practical advice on protecting your commercial interests and managing personal guarantee risks.