Personal Guarantees and Bankruptcy

A common requirement of credit applications, terms of trade and lease agreements signed by Companies (or at times, individuals) is that a Director or another person must sign a personal guarantee. The purpose of the personal guarantee is to limit the exposure of the supplier, so that if the customer defaults or goes into external administration, the supplier may call upon the guarantee, and demand that the guarantor(s) pay any outstanding amount – often with interest and costs. 

(See our article on Personal Guarantees: Risks and Rewards.)

Unfortunately, if the guarantor is unable to pay the amount they are liable for under the guarantee, the supplier will generally be entitled to issue proceedings seeking judgment against the guarantor for the full debt owing, plus interest, mercantile costs and/or legal costs, depending on how broad the guarantee is.

If the judgment ordered remains unpaid, the supplier generally may then seek to enforce the judgment, or may issue Bankruptcy proceedings against the guarantor, if the debt is for over $5,000.

This often results in a personal guarantor being made bankrupt for a debt incurred by a company which the personal guarantor does not have the resources readily available to pay.

This is a form of a creditor initiated Bankruptcy proceeding.

Most often we are the ones enforcing the guarantee on behalf of a creditor but sometimes, we see guarantors seeking legal assistance early on when a supplier makes demands on them for payment under a personal guarantee they have signed.

This usually happens when the principal debtor for the debt is a company that has been put into external administration exposing the personal guarantor’s liability for payment of the debt.

In our experience, there are two questions commonly asked by guarantors in such an instance:

A.   Am I still liable if the company goes into external administration?

If the company who owes the debt directly goes into administration, receivership or liquidation, the guarantee continues to operate. The liquidation of the company does not in any way sever the guarantee, unless the guarantee expressly states that it does.

B.   What if I signed a personal guarantee as a Director, and I have left the company?

Unless you have received confirmation from the supplier that you are released from the personal guarantee, or have otherwise notified them in a binding way that you no longer agree to be bound by the personal guarantee, it continues to operate.

For this reason we recommend directors maintain a register of personal guarantees they have signed. One of the many benefits of maintaining a register of personal guarantees is that you can quickly and easily communicate with any suppliers you have signed personal guarantees with, to seek releases. You will not want to be liable for debts incurred by a company you no longer have control over, or any knowledge of what debts they are accruing!

If a guarantor does not obtain a release, they remain liable and exposed under those personal guarantees, even after they have left the company and even if the debt was incurred by the company after they left.

If a guarantor has left a company, and is unable to obtain a release, they may seek to obtain an indemnity from the company or from its new director(s) however these agreements do not bind the supplier: they simply give the guarantor an avenue to recover. These do not however stop the supplier from enforcing the guarantee against the guarantor.

We suggest that if you have left (or are leaving) a company where you have signed personal guarantees that you contact us, and bring a copy of any personal guarantees you have signed, so that we may assist you in obtaining releases or putting the creditors officially on notice of your departure from the company. Creditors will also appreciate this information as they can update their records as to the operations of their debtor.

And then what?

The reality is that personal bankruptcy through a debtor’s petition as a personal guarantor should be the last resort.

Unfortunately, sometimes the only remaining option is to go into Bankruptcy, if the personal guarantee is valid and a guarantor is unable to make payment satisfactory to the creditor.

If this is where you find yourself, please contact us to discuss your options, and so that we may refer you to a reputable Trustee so that you may appoint them over your estate, to commence the process in a smooth and straightforward way.

If you would like to talk to a lawyer about your potential or action exposure under a personal guarantee, please contact Amanda Carruthers (Director, Insolvency Practice Group) on (03) 9629 9629.