There are three elements that a Personal Guarantee needs.
- Must be explicit
It is not enough to bury a term in the terms of trade signed by the director that says something like:“The person who signs this agrees to be personally liable for the debt”Ideally the person signing should sign twice. Once on behalf of the company and once in their personal capacity as guarantor. And it should be clear and explicit that they are personally guaranteeing the debt.Now that we have a Voluntary Administration regime it makes sense for the guarantee to cover the possibility that, if the company’s debts are changed as a result of a successful company restructure via a DOCA, that the guarantor is liable for all the debts incurred by the company up to the date of Administration.There have been cases in Australia where personal guarantees have failed because the guarantee only covered the debts owed by the company, which can be reduced by a DOCA, as opposed to debts incurred by a company, which remain incurred, even if not owed with the passing of a DOCA.
- Must be for consideration
The person signing must gain some advantage for the signing of the guarantee. Usually this is no more than you agreeing to supply credit to the director’s company. However, where a debt has been incurred, a personal guarantee can be worthless if no consideration is given for the guarantee.Two solutions to this are to get the director to sign a deed to guarantee the existing debt or offer some consideration with respect to the existing debt. Two common options are to agree not to enforce the current debt in return for a time payment by the company, or to agree to extend further credit.
- The person signing must be a person who benefits from the guarantee.
Personal guarantees have been attempted to be enforced against accounts clerks who rather recklessly sign them for the companies they work for (these tend not to stand up.)
- Must be explicit
Our strong advice is to spend the money with your lawyer to get your terms of trade and personal guarantees locked tight. And most importantly, get them signed. It is depressingly frequent that we see the most beautifully worded and comprehensive guarantees. Unsigned. Worthless.