Personal guarantees in business
It is a standard term of a lease or terms and conditions of trade for the supply of goods or services, that a personal guarantee be provided to ensure that a business pays its debts.
A personal guarantee is usually provided by the company director and can be any or all of the following:
- unsecured by the company director’s undertaking to pay all, or a set amount, of the debts incurred by the company;
- for a set period of time or unlimited in duration;
- secured by a charge (by way of mortgage or caveat) over the director’s assets and/or real property.
The following are common issues that arise in relation to personal guarantees:
- if the company director sells the company business, that departing director must ensure that he or she is released from all past, present and future liabilities of the business, including those liabilities which may arise under the personal guarantees, such as lease obligations, loan facilities and supply agreements;
- standard terms of trade allow a creditor to recover the debt from the guarantor (ie. the company director) prior to any action or legal proceeding being taken against the company;
- where a guarantee is provided in respect of debts incurred by a group of companies, it is important that the guarantor is aware of the extent of that potential liability;
- If a guarantor pays out a supplier, the guarantor can assume the security that the supplier had over the company assets and seek indemnity/recovery of the amount paid from the company and/or contribution from any other joint and several guarantors;
- the terms of trade sometimes allow for the creditor to act as your attorney – by way of a power of attorney – to sell your assets in satisfaction of the debt;
- to be enforceable, a guarantee must be signed separately and not as part of the document requiring the company to sign as the principal (lessee or trade customer).
Often, providing your supplier with a registered security interest over the assets of the company may be sufficient security.
There are several defences to claims made pursuant to a guarantee including duress, misrepresentation, unconscionable conduct, no benefit to the guarantor providing the guarantee unless a deed was signed or that the amount claimed exceeds the amount guaranteed.
Whilst there may be little room to negotiate, vary or amend the terms of a lease or terms of trade, it is important to at least know your rights before signing them away.