What is a personal guarantee?
A personal guarantee is a legally enforceable promise (made by a natural person) to fulfil a third party’s obligations – such as those of a company – if it is unable to do so.
Personal guarantees are commonly entered into by directors of small businesses to secure debts for leasing contracts, trade supply agreements or loan agreements. Guarantees may be a separate document, or a clause within a contract.
Personal guarantees are a tool available to creditors to pierce the corporate veil and hold directors responsible for the company’s debts or obligations.
Personal guarantees during liquidation
When a company enters liquidation, these guarantees are typically triggered, making them immediately enforceable. If the director fails to fulfil their obligations, the creditor may pursue a court judgment and enforcement orders. The orders sought could include the seizure and sale of unencumbered assets, the garnishment of wages, or a sequestration order (bankruptcy) depending on the circumstance and terms in the guarantee document.
Can a liquidator help a director navigate a personal guarantee?
A personal guarantee is an agreement between a creditor and an individual. The appointed liquidator has no authority or control over the actions a creditor may take to enforce a personal guarantee. The director should seek separate advice from an independent insolvency practitioner or solicitor regarding their personal circumstances.
Commercial considerations and personal guarantees
As always, commerciality is key. Enforcing a personal guarantee through the courts is a costly, time-consuming exercise, that is only viable where the director has sufficient assets. If a director has insufficient assets to satisfy their obligations, the personal insolvency framework may be the best way to compromise the debt. In many cases, commercially minded creditors will be open to negotiating a compromise outside of court.
Reducing the impact of personal guarantees
Personal Insolvency Agreements (Part 10 Agreements) are legally binding arrangements under the Bankruptcy Act 1966 (Cth), facilitated by a registered trustee. They enable the debtor and creditor to negotiate alternative repayment terms, often involving either a lump sum payment or scheduled installments. The total sum paid is typically a reduced portion of the original debt.
The takeaway
During liquidation, an appointed liquidator has no authority regarding the enforcement of personal guarantees. If a director is experiencing financial distress, they should consult an independent insolvency practitioner to explore the most effective way to compromise the debt. The best course of action for a director will depend on their individual circumstances.
