The Bank Has Called In Your Personal Guarantee
You signed a personal guarantee when the company took on debt - a lease, a loan, a line of credit, a supplier arrangement. Now the company cannot pay, and the creditor is demanding payment from you personally. A personal guarantee is a binding contractual obligation that exposes your personal assets - your home, your savings, your investments - to the company's debts. The amounts involved can be significant and the consequences are serious, but there are defences and negotiation strategies available.
What You Need To Know
A personal guarantee is a contract under which you agree to be personally liable for the debts of the company if the company fails to pay. It is separate from the underlying loan or facility agreement and survives the company's insolvency.
Most guarantees given by directors to banks are drafted broadly and include indemnity clauses that go beyond the guarantee itself. The indemnity may cover interest, enforcement costs and other amounts not covered by the guarantee.
There are limited grounds to challenge a personal guarantee. Potential defences include unconscionable conduct, misleading or deceptive conduct, duress, undue influence, material variation of the underlying facility without the guarantor's consent and defects in the guarantee documentation.
If the guarantee was given by your spouse or partner who had no involvement in the business, the Australian Consumer Law and equitable principles provide additional protections against unconscionable or unfair guarantees.
The creditor must usually make a demand on the principal debtor (the company) before calling on the guarantee. Check whether proper demand has been made and whether the creditor has complied with any conditions precedent in the guarantee.
Negotiation is almost always available, even after a formal demand. Creditors generally prefer a negotiated outcome over enforcement proceedings, particularly where the guarantor's assets may be difficult to realise or where enforcement would result in bankruptcy.
What To Do Right Now
Read the guarantee and the demand carefully
Identify the exact obligations you have guaranteed, the amount being demanded, whether the demand complies with the terms of the guarantee and whether there are any conditions the creditor must satisfy before calling on the guarantee.
Assess your personal exposure
Calculate the total amount at risk, including the principal debt, accrued interest, default interest and enforcement costs. Consider what personal assets the creditor could pursue if the guarantee is enforceable.
Check for potential defences
Was the guarantee properly explained to you? Were you given independent legal advice? Has the underlying facility been materially varied without your consent? Was the guarantee procured through undue influence or misleading conduct? These issues may provide a defence.
Do not ignore the demand
If you do not respond to the demand, the creditor can commence proceedings to enforce the guarantee. Judgment can be obtained, and enforcement action (including bankruptcy proceedings) can follow. Engaging early gives you more options.
Get legal advice before negotiating
A lawyer can assess whether the guarantee is enforceable, identify any defences and negotiate with the creditor on your behalf. Creditors often accept less than the full amount or agree to payment plans, particularly where the alternative is protracted litigation.
How We Can Help
We advise directors and business owners who are facing demands under personal guarantees. We review guarantee documentation for potential defences, negotiate with creditors to reduce the amount payable or agree payment terms and defend enforcement proceedings where the guarantee is challenged. We also advise on asset protection strategies and the interaction between personal guarantee exposure and director duties.
Do not ignore the demand. Respond within the timeframe specified or risk enforcement action.
Don't wait until your options narrow.
We can usually assess your position within a single consultation. Call us or send an enquiry and we will get back to you promptly.