Personal Guarantee

What Is a Personal Guarantee?

A Personal Guarantee is a legal promise made by an individual, usually a director or business owner, to repay a debt if their business cannot. When you sign this document, you are agreeing that your personal assets like your home, car, or savings are at risk if the company defaults on its payments.

In the Australian business landscape, lenders and suppliers often view a company structure as a way to limit risk. If a company runs out of money, it can go into liquidation, leaving unpaid debts behind. To protect themselves, creditors ask for a Personal Guarantee to create a direct link between the business debt and the individual's personal finances.

For tradespeople and suppliers, this document is a crucial tool for securing payment on credit accounts. For startups and small business owners, it is often the only way to secure a lease or a bank loan. It effectively removes the limited liability protection of a company for that specific debt.

When to Use This Document

You should consider using a Personal Guarantee whenever you are extending credit to a company or entering a contract where the other party's ability to pay is in doubt. This is common in several specific scenarios across Australian industries.

Commercial Leasing Landlords almost always require a director of a tenant company to guarantee the lease for retail or office space. If the startup fails and breaks the lease, the landlord can pursue the director for the remaining rent.

Supply of Goods on Credit Tradies and suppliers often provide building materials or inventory with 30-day payment terms. If you are supplying a Pty Ltd company, you are essentially lending them money for that period. Using a Credit Application Form that includes a Personal Guarantee ensures you can recover the cost of materials if the company goes under.

Bank Loans and Business Finance Banks and financial institutions generally will not lend to a new company without a guarantee. They use this to secure the loan against the director's assets, such as the family home. Banks typically use a more complex document known as a "Deed of Guarantee and Indemnity" for these purposes.

Equipment Hire Hire companies for heavy machinery or equipment often require a guarantee to cover the cost of damage or loss that insurance might not cover.

Key Sections and Required Elements

A robust Personal Guarantee must contain specific legal clauses to be enforceable and effective. Relying on a handwritten note or a vague email creates significant risk.

The Guarantee Undertaking

This is the core of the document. It must clearly state that the Guarantor agrees to pay the debts of the Borrower. You need to define the "Guaranteed Obligations" precisely. This might be a specific loan amount, a lease liability, or a trade credit limit. Some creditors use an "All Monies" clause, which covers all current and future debts the company owes to the creditor. While this offers broader protection, it can be subject to scrutiny under unfair contract laws if not carefully drafted.

Indemnity

The Indemnity clause is distinct from the guarantee itself. While the guarantee covers the debt, the indemnity covers the creditor's costs and losses. It ensures the Guarantor must pay for the creditor's legal fees and enforcement costs incurred in recovering the money. This prevents the Guarantor from arguing that the creditor should have acted differently or delayed enforcement.

Continuing Security

This clause ensures the guarantee remains valid even if the underlying debt changes. For example, if a borrower increases their credit limit or extends the repayment terms, the Continuing Security clause means the Guarantor is still bound without needing to sign new paperwork. This is vital for long-term supplier relationships where account balances fluctuate.

Release and Discharge

You must clearly state when the Guarantor is released from their obligations. Typically, this happens once all guaranteed debts are paid in full. It is also smart practice to include a "Release on Sale of Business" clause. If the guarantor sells the business or the company is sold to a new owner, this clause ensures the original guarantor is not liable for debts incurred by the new owners.

Accessorial Clauses

These are supporting terms that strengthen the creditor's position. They often include a confirmation that time is of the essence, meaning strict deadlines apply to payments and notices. They also waive the right to demand notice of default, allowing the creditor to act immediately if the company misses a payment.

How to Write a Personal Guarantee (Step by Step)

Creating a Personal Guarantee requires attention to detail to ensure it holds up in an Australian court.

Step 1: Identify the Parties Correctly

You must clearly name the Creditor, the Borrower (the company), and the Guarantor. For companies, use the full legal name as registered with ASIC, including the ACN or ABN. For individuals, use their full legal name and current residential address.

Step 2: Define the Secured Liability

Be specific about what is being guaranteed. If it is for a specific loan, quote the loan amount and reference the loan agreement. If it is for a trade account, specify the credit limit (e.g., "The sum of $50,000"). If you intend it to cover "All Monies" owing, you must state this explicitly, though you should be aware of the risks regarding unfair terms.

Step 3: Draft the Promise to Pay

Write a clear statement that the Guarantor promises to pay the debt on demand if the company fails to do so. Avoid complex legal jargon where simple language will suffice, but ensure the obligation is absolute. The phrase "principal money, interest, costs and charges" is standard to ensure nothing is left out.

Step 4: Include the Indemnity

Add a clause stating the Guarantor indemnifies the Creditor against all losses and expenses. This includes legal costs on a solicitor-and-own-client basis, which is higher than standard court costs, ensuring the creditor is not out of pocket for enforcement.

Step 5: Check for National Credit Code Requirements

If you are in the business of lending money and this guarantee relates to a consumer credit contract regulated by the National Credit Code (NCC), you must include the specific warning statement required by Section 17B of the National Consumer Credit Protection Act 2009.

• Note: Trade credit, where a supplier provides goods or services in the ordinary course of business (like a builder supplying timber), is generally exempt from the NCC. However, if you are a finance company or buy-now-pay-later provider, this warning is mandatory. Missing it can render the guarantee unenforceable.

Step 6: Address Spousal Consent (NSW and QLD)

If the Guarantor owns a home with their spouse and the property is in New South Wales or Queensland, you need to be very careful. Under Section 68 of the Conveyancing Act 1919 (NSW) and Section 177(1) of the Property Law Act 1974 (QLD), a guarantee can be voidable if the spouse does not receive independent legal advice. If a spouse is required to sign to support the guarantee (often to consent to a mortgage over the home), they must sign a certificate confirming they received legal advice. Failure to have this witnessed and signed by a lawyer is a common mistake that invalidates the security.

Step 7: Execution and Witnessing

The Guarantor must sign the document. In some cases, such as when the guarantee is a "Deed," the signature must be witnessed by an independent adult over 18. Ensure the witness prints their full name, address, and occupation. Using a Justice of the Peace (JP) is a good practice for added reliability.

Common Mistakes to Avoid

Failing to Witness Spousal Signatures As mentioned, in NSW and QLD, getting a spouse to sign without a lawyer's certificate is a critical error. If the creditor tries to enforce the guarantee against the family home, the guarantor's spouse can successfully block the action if they did not receive independent legal advice prior to signing.

Using Vague "All Monies" Clauses in Standard Form Contracts If you are a large supplier dealing with small businesses, you must be careful with standard form contracts. The Australian Consumer Law protects small businesses (fewer than 20 people, turnover under $5 million) from unfair contract terms. An "All Monies" guarantee that creates a significant imbalance and is not reasonably necessary to protect your legitimate interests may be declared void by a court.

Not Registering on the PPSR A Personal Guarantee is not a security interest in itself, but it is often supported by one. If you take a charge over the company's assets or the guarantor's personal property, you must register it on the Personal Property Securities Register (PPSR). Without registration, if the guarantor goes bankrupt, you rank as an unsecured creditor and will likely get cents in the dollar. Registration "perfects" your security interest.

Not Updating Details If the Guarantor changes their address or the company changes its structure, the guarantee needs to be reviewed. Relying on old details can make serving a legal notice of default difficult, delaying enforcement.

Confusing a Guarantee with an Indemnity Some documents mix these up without distinguishing them. The Guarantee is the promise to pay the debt. The Indemnity is the promise to cover the costs. If you only have a guarantee clause, you might struggle to recover your legal fees when chasing the debt. Ensure both are present.

Legal Considerations (AU)

Understanding the legal framework surrounding Personal Guarantees is essential for both creditors and those signing them.

Statute of Limitations

The time limit for enforcing a debt is governed by state legislation, such as the Limitation Act 1969 (NSW) or equivalent acts in other states. Generally, a creditor has six years from the date the cause of action arises (usually the date of default) to start legal proceedings. However, if the document is executed as a "Deed" rather than a simple contract, the limitation period is often longer, typically 12 to 15 years depending on the jurisdiction. Banks and major lenders almost always use a Deed of Guarantee for this reason.

Unfair Contract Terms

The Australian Consumer Law applies to small business contracts. If you provide a standard form Personal Guarantee to a small business, terms that are deemed unfair can be voided. This includes terms that allow you to terminate the contract unfairly, vary the terms without consent, or limit your liability but not the other party's. The ACCC actively monitors this area. If you are a small business owner being asked to sign a lengthy, non-negotiable guarantee, be aware that these protections exist.

PPSA and the PPSR

The Personal Property Securities Act 2009 (Cth) changed how security interests work in Australia. While a promise to pay is a contract, a security interest over personal property must be registered on the PPSR. If a guarantor grants a charge over their assets (like shares in a company or a vehicle), registering this interest is vital. If you do not register, and the guarantor becomes insolvent, a liquidator or bankruptcy trustee can take those assets, leaving you with nothing.

Director Duties

Directors should be aware that giving a personal guarantee does not breach their duties, but it does expose them to significant personal risk. If a company is insolvent and directors continue to trade while incurring debts they have personally guaranteed, they could face liability for insolvent trading under the Corporations Act 2001. This creates a double jeopardy: the company fails, and the director is personally liable for the debts guaranteed, plus potential breaches of duty.

Bankruptcy Considerations

If a Guarantor cannot pay and enters into bankruptcy or enters a Personal Insolvency Agreement, the creditor becomes an unsecured creditor in that estate (unless they have a registered security interest). This usually results in a poor return. Creditors should assess the financial position of the Guarantor before extending credit. A guarantee is only as good as the assets behind it.

Frequently Asked Questions

Can I limit the amount of the guarantee? Yes. It is best practice to cap the guarantee at a specific dollar amount, such as the credit limit or the value of the lease. This prevents the creditor from claiming unlimited funds for "All Monies" which may include unexpected penalties or future debts that were not anticipated.

Does a guarantee need to be prepared by a lawyer? No, it does not strictly need to be prepared by a lawyer to be valid. However, given the complexity of the National Credit Code, the Conveyancing Act (NSW/QLD) requirements regarding spousal consent, and the Personal Property Securities Act, having a legal professional review the document is highly recommended. A poorly drafted guarantee may be unenforceable.

What is the difference between a Guarantor and a Co-Borrower? A Guarantor only pays if the primary borrower defaults. A Co-Borrower is primarily liable from the start. A creditor can pursue a Co-Borrower immediately without proving the primary borrower is in default.

Is a Personal Guarantee valid if it is not witnessed? For simple contracts, a witness is not always strictly required for validity, but having a witness provides evidence that the person actually signed the document. For Deeds, witnessing is usually a strict requirement. Given the high stakes, witnessing should always be standard practice.

Can I get out of a Personal Guarantee? It is very difficult. Once signed, it is a binding contract. You may be released if the creditor materially varies the loan terms without your consent, or if the creditor releases another guarantor without your permission (discharging you by novation). However, the safest way to get out of a guarantee is to negotiate a release with the creditor, usually upon refinancing or sale of the business.

Does the guarantee cover GST? Usually, yes. Most "All Monies" or indemnity clauses are drafted broadly enough to include any amounts payable by the Borrower to the Creditor, which includes GST. If you are drafting a specific guarantee for a fixed sum, ensure you clarify whether the amount is inclusive or exclusive of GST.