Personal Guarantees / Bank guarantees or director’s guarantee - What Are You Really Signing?

If you have been asked to sign a personal guarantee, sometimes called a Director’s Guarantee, for a business loan, commercial lease or supplier agreement or any other agreement, it is critical to understand exactly what you are agreeing to.

It can be common for lenders, landlords and trade suppliers to require directors and business owners to sign personal guarantees before extending credit or entering into a Lease.

But what does a personal guarantee actually mean and what are the risks to you personally? This article explains what you need to consider before signing a personal guarantee or agreeing to one.

What Is a Personal Guarantee/Bank Guarantee?

A personal guarantee, also known as a bank guarantee, is a legally binding agreement where you contract with the Lender/Creditor to repay a debt if the borrower cannot. The borrower may be a company, trust, self-managed super fund (SMSF) or another person.

A Guarantee means you guarantee all the obligations of the borrower/tenant under the loan agreement/lease. The loan agreement/lease is the contract between the lender/creditor and the borrower/tenant. The Guarantee is a contract between the guarantor/tenant and the lender/landlord.  It allows the lender/creditor/landlord to pursue you individually for any debt owing if the borrower/tenant defaults.

In practical terms, this means that you become personally liable for the borrower’s debt including default costs. Your personal assets are at risk. The creditor may not even need to attempt recovery from the borrower but demand you pay instead. If there are co-guarantors they are usually all severally liable for the whole guaranteed amount, not just part of it. That means you can be pursued for the whole amount, not just part of it.

By singing a guarantee, you will significantly reduce the asset protection normally provided to you by operating through a company or trust..

When Are Personal Guarantees Required?

Personal guarantees are commonly requested for:

·         Commercial leases;

·         Business loans and overdrafts;

·         Equipment finance;

·         Franchise agreements;

·         Trade credit accounts; and/or

·         Property development finance.

It is standard practice for commercial landlords to require directors to personally guarantee lease obligations of a corporate tenant.

What Are You Personally Liable For?

The scope of liability depends on the wording of the guarantee. However, many personal guarantees include:

·         Unlimited Liability - no cap to the amount you are liable for. You can be personally liable for the total amount owed by the company.

·      “All Monies” Clauses - an “all monies” guarantee covers existing debts, future debts (which you may not be made aware of), interest, enforcement costs and legal fees

·         Joint and Several Liability - if multiple guarantors sign, the creditor can pursue any one of you for the full amount. This means you could be liable to pay the full debt, even if there are four personal guarantees.

·      Indemnity Provisions - some guarantees also include an indemnity, which means you may have an additional and even wider responsibility to pay — beyond what the guarantee alone would normally require, such as the lender/creditors cost of enforcement

What Assets are at Risk?

 If you have signed a personal guarantee, a creditor may seek recovery against:

 ·         Your home or other properties owned by you;

 ·         Bank accounts;

 ·         Shares and other investments;

 ·         Motor vehicles; and

 ·         Other personal assets.

What Happens If Your Company Goes into Liquidation?

Many people assume that if the company is wound up and they have given a personal guarantee, their liability ends. It does not if you have signed a personal guarantee.

If the company enters into administration or liquidation, creditors can enforce the personal guarantee and commence recovery action against you personally. Depending upon the wording and nature of the personal guarantee, the creditor can commence recovery action against you to recover the total amount owing and, in some cases, commence bankruptcy proceedings against you if you do not pay.

Can You Negotiate a Personal Guarantee?

A personal guarantee can sometimes be negotiated. For example, you may be able to negotiate to limit the guarantee to a fixed amount, narrow or clearly outline specific items included in an “all monies” or indemnity clause or negotiate a release of the personal guarantee after a specified time frame.

 Should You Get Legal Advice Before Signing?

Absolutely you should. Obtaining independent legal advice before signing a personal guarantee is crucial to protecting you and your assets and to ensuring you know and understand what you are signing and the risks to you.

What we do:

 ·         Review and explain the scope of liability;

 ·         Identify high-risk clauses;

 ·         Advise you on exactly what risks there are to you in signing the guarantee;

 ·         Advise you on asset protection considerations; and

 ·         Assist with negotiations.

 Case Study

Client A ran a retail business.

Client A signed personal guarantees to suppliers which allowed suppliers to lodge caveats over their property as security for the provision of lines of credit the client used to purchase stock.

The company went into liquidation. The creditors did not actively pursue Client A for recovery of funds owing. Client A assumed the company debts were dissolved with the company liquidation. Client A also declared bankruptcy.

Several years later Client A went to sell their property, only to find that there were caveats registered over the property which restricted settlement being able to take place.

Client A came to Wollerman Shacklock and instructed our firm that the company went into liquidation years prior and requested assistance to have the caveats registered over the property be removed.

Our office contacted the caveators requesting evidence of their grounds for the caveats. The caveators provided evidence that Client A had signed personal guarantees to secure the credit provided to the company which allowed them to register caveats over the property, and those lines of credits remained unpaid.

Luckily, we were able to negotiate with the creditors for Client A to pay a reduced amount to settle the unpaid company debts in exchange for the removal of the caveats in order for settlement of their property to proceed.

Client A remembered signing the personal guarantees but did not understand what that meant and that they would be personally liable years later after the company went into liquidation. They assumed liquidation and personal bankruptcy sorted all that out!

Key Takeaway

Before signing a personal guarantee, ensure that you seek legal advice to guarantee that you understand the full extent of your liability and the risks to you.

If you are being asked to sign a personal guarantee for a commercial lease, business loan or supplier agreement, obtaining legal advice first can significantly reduce your risk.

Understanding what you are signing today, may save you thousands, if not hundreds of thousands, tomorrow.

It is worth the legal costs!