A director’s dilemma: to guarantee, or not to guarantee?

It is becoming increasingly common for directors to provide personal guarantees (PGs), guaranteeing a company’s obligations. Whether the guarantee is to secure a lease, obtain funding for working capital or reassure a supplier, the terms of each guarantee will differ, but the underlying principle remains the same – a personal commitment to ensure the satisfaction of the company’s obligations, often including repayment of the company’s debts.

When requested to sign a PG, directors should always conduct a careful review of the terms and seek legal advice. Some general questions that directors can first consider and ask themselves before they sign on the dotted line are:

1. Is the guarantee necessary? When reviewing the terms of the PG (which may be its own document or part of another), consider if the PG is a non-negotiable, simply a preferred term or a default request for the guaranteed party. Don’t assume it’s mandatory without asking – the requesting party may be open to waiving or limiting it.
2. Have you considered personal exposure? Before agreeing to give a PG, take stock of what assets you own personally. If a PG is enforced, these assets may be at risk. There are personal asset protection strategies, such as transferring key personal assets (like a family home) into a trust (if appropriate) to limit exposure.
3. Is your liability limited or unlimited? If the PG is unlimited, you are liable for the future borrowing and liabilities of the company to the guaranteed party. Where possible, try to negotiate a cap on your liability under the PG, such as a specific monetary amount or time cap.
4. Are you jointly and severally liable under the guarantee? The fact that another director is providing a PG alongside you does not mean that you are only liable for a portion of the company’s obligations. Joint and several liability (a common concept in PGs) means that one signatory could be responsible for the entire debt, not just a portion. If possible (and appropriate), liability should be apportioned so one party isn’t shouldering the entire burden. Consider entering an agreement which contains rights of contribution by the other guarantors should one guarantor be required to satisfy the full debt.
5. Guarantee or indemnity, or both? Check whether the document includes an indemnity in addition to or as part of the PG. The inclusion of an indemnity increases your risk under a PG. Where a PG includes an indemnity, seek legal advice so you can understand the position clearly.
6. Is your liability ongoing? Depending on the terms of the PG, your liability may continue unless the PG is expressly released. For example, if you guarantee a lease and it is later assigned to another entity, your liability may remain on foot unless you obtain a formal release. A release of a PG should always be confirmed in writing.
7. How can you release your PG? Keep a clear record of all PGs you sign and make sure you understand the process to release your obligations. Some PGs may terminate upon written notice; others may continue for a set duration. Make sure you know the conditions under which you can be released. This is also helpful information to have if you need all your PGs released, for example, if you resign as a director or the business or company is sold.
8. What are the consequences of default? If a debt is called upon for repayment, and you do not have the means to repay the company’s debts, you may find yourself being personally bankrupted and therefore disqualified from acting as a company director. The consequences of default are significant, so it is crucial you understand the financial position of the company (and your personal asset position) before agreeing to provide a PG (and continue to do so for as long as the PG remains).

PGs are not without risk, but they are sometimes necessary in business. If you understand what you are signing, ask the right questions, negotiate where possible and obtain professional advice, you can seek to limit your liability when giving a PG.

Danita Ferreira, Senior Associate

Miriam Doak, Associate