A personal guarantee is an individual’s legal promise (“the Guarantor”) to perform the obligations of a third party that/who is unable to repay a debt, more commonly in relation to credit issued to such third party. The Guarantor assumes personal responsibility for the balance and/or damages suffered by a creditor (e.g. lender) as a result of the third party’s inability to pay a debt or breach of contract.
Personal Guarantees are often an effective mechanism to mitigate the risks of a client/borrower/debtor failing to comply with their contractual terms under contract as it provides creditors more than one avenue to recover monies owing to them, particularly if a client/borrower/debtor is a company that has little to no assets and could be wound up to avoid paying a debt.
More often than not, personal guarantees will include two elements; (1) a personal guarantee to perform, and (2) an indemnity. The personal guarantee relates to the Guarantor’s liability to fulfil the third party’s obligations under contract which the third party failed to perform, whilst the indemnity relates to the Guarantor’s liability to compensate the creditor for loss occurring from the wrongdoing of the third party. It is therefore important that the Guarantor maintains good communication with the third party to ascertain the level of indebtedness.
It is not uncommon for creditors to require the directors of a company to provide personal guarantees as part of a credit transaction. Generally, if there are multiple directors (or Guarantors), their liability will be equal and several, which means the Creditor may pursue each Guarantor for the full debt. The same applies in all circumstances where there are multiple Guarantors.
Some of the key questions or considerations you should ask, or may be asked by your lawyers, include:
- Do you understand English?
- Have you read through the personal guarantee documents?
- Do you have experience in providing a personal guarantee?
- Are you obligated to execute the personal guarantee?
- Does the guarantee include an indemnity?
- Does the guarantee relate to a specific transaction or is for ‘All Accounts’?
- Is the guarantee limited in duration or continuing?
- Is the guarantee limited to a certain amount or a whole debt?
- What are the implications for multiple guarantors?
- In what capacity are you providing a guarantee – personal, on behalf of company or trust?
- Are you under any duress, undue influence or commercial pressure?
Creditors are not required to pursue the debtor for a debt or damages before making a claim against a Guarantor. Before executing a personal guarantee, you should obtain legal advice and ensure you understand your liabilities in providing a personal guarantee. Lenders usually require that borrowers obtain a Solicitor’s Certificate before settling a loan. You can read more about these here.
It is important that a personal guarantee contains clear wording and accurately reflects the intention of the parties. Failing to, the guarantee may be unenforceable. Notwithstanding any essential elements, a personal guarantee must be in writing, executed by all relevant parties and be executed correctly. It must also satisfy the elements of offer, acceptance and intention to be bound by law, and consideration must be provided.
Personal guarantees are subject to strict interpretation, thus it is important to include everything that the parties intend to be bound by before the Guarantor signs, as there will be no turning back, unless agreed and varied in writing. Creditors must also ensure that a Guarantor is able to meet their obligations under the personal guarantee, by performing searches or investigations into the Guarantor’s asset position. If a Guarantor does not have sufficient assets to repay or comply with their obligations under the personal guarantee, there is no point to the arrangement.
Other common drafting pitfalls which may render a guarantee limited, invalid or unenforceable include:
- Incorrect party names or ABN/ACN (particularly where a company has associated entities)
- Failing to accurately describe the debt, extent of liability or the guarantor’s obligations
- Omitting pages from the final executed document (more common than you may think)
- Incorrect execution block – particularly where creditor is a company
- Ambiguous and unclear terms which could lead to a genuine dispute
Want more information or have any questions about personal guarantees?
If you are required to provide a personal guarantee, or your business wishes to obtain personal guarantees, please feel free to contact our team to discuss further.
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