What is a personal guarantee?
A personal guarantee is essentially a promise by an individual to be personally liable for the debts of another person or entity. The guarantee creates a separate liability as between the guarantor and creditor in whose favour the guarantee is given.
One of the most common personal guarantees is where a director of a company guarantees the debts of that company.
The terms of the personal guarantee will determine whether it is an unsecured or secured guarantee as follows:
- Unsecured – Where the guarantee does give the creditor any security (such as a mortgage) over a particular asset of the guarantor;
- Secured – Where the guarantee is supported by the grant of security over a particular asset of the guarantor, such as a mortgage registered over real property owned by the guarantor.
A personal guarantee may also obligate the guarantor to pay other amounts, in addition to the actual debt guaranteed, that the creditor incurs in enforcing the guarantee; these other amounts usually include costs such as legal fees and interest.
What are the main risks of giving a personal guarantee?
Loss of personal assets and/or bankruptcy
Even if a guarantee is unsecured, if a creditor demands payment from you under the guarantee and you do not pay the debt, then that creditor may sue you personally and seek a Court judgment for the amount claimed. If judgment is obtained, then the creditor will be entitled to enforce that judgment against you, and which enforcement can include methods such as obtaining a warrant of seizure and sale of your property, a warrant of redirection of your debts or earnings, or commencement of bankruptcy proceedings (if the judgment is for more than $5,000).
End of director relationship with company does not mean automatic termination of personal guarantee
In a company director guarantee scenario, where a director has signed a personal guarantee, simply ceasing to be a director of the company does not automatically terminate the personal guarantee. Likewise, the fact that the company may be placed into external administration does not stop the personal guarantee from being called on against the director by a creditor (though there may be a moratorium period that stops this from occurring for a period of time). In order to be released from a personal guarantee, the guarantor must obtain the consent from, at least, the creditor in whose favour the guarantee was given and, in some instances, also the the debtor.
Obtain early legal advice
If you are asked to provide a personal guarantee, whether as a company director or otherwise, you should obtain professional legal advice before signing it so that all of the risks and consequences of becoming a guarantor can be explained to you.
Should you wish to protect your interests by requiring someone, such as a company director, to provide a personal guarantee, then you should also obtain professional legal advice in respect to the terms of the guarantee to ensure that it will have the intended effect, and give you maximum protection.
If you would like more information on guarantees, or any other debt recovery issue, then please call us on (07) 4616 9898.
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.