One signature is the exception to limited liability | Source: Pexels

Many business owners in New South Wales operate through a proprietary limited company because it offers limited liability. The company borrows, the company signs the lease, and if the business fails, your family home and savings are supposed to be safe.

There is one document that quietly undoes all of that protection: the personal guarantee. It is usually a few pages tucked inside a loan agreement, a commercial lease, or a supplier's credit application. Many of our clients tell us they signed one years ago without reading it closely, or without realising they had signed one at all. When the business later runs into trouble, that signature is the reason a bank, landlord, or supplier is suddenly pursuing them personally.

This article explains what a personal guarantee is, when you will be asked to sign one, what can happen if it is enforced, and what you should do before you sign.

A personal guarantee is a legally binding promise that you, as an individual, will pay a debt or perform an obligation of your company if the company does not. Once you sign, the "corporate veil" that normally separates your personal assets from the company's debts no longer protects you for that particular obligation. The creditor can pursue you directly.

In practice, you will most commonly be asked for a personal guarantee in four situations: when your company applies for a bank loan, overdraft, or equipment finance; when you sign a commercial lease for a shop, office, restaurant, or warehouse; when a supplier agrees to provide goods or services on credit terms, usually through a credit application form; and when your company enters a franchise agreement.

For new businesses or companies without a strong trading history, creditors treat the guarantee as standard practice. That does not mean the terms are non-negotiable, and it certainly does not mean you should sign without understanding what you are agreeing to.

The wording of the guarantee determines how much danger you are in. Three distinctions matter most.

Limited or unlimited. A limited guarantee caps your liability at a fixed dollar amount. An unlimited guarantee covers the full debt, plus interest, enforcement costs, and legal fees. Many standard bank and lease guarantees are unlimited.

Specific or "all moneys". A specific guarantee covers one identified debt, such as a particular loan. An "all moneys" guarantee covers everything your company owes that creditor now or in the future. These clauses are common in supplier credit applications, and they mean your exposure grows every time your company places another order.

Joint and several. Where two or more directors sign, the creditor can usually recover the entire debt from any one of them. If your co-director has no assets, you can be left paying the whole amount, then trying to recover their share yourself.

This is the part most people underestimate. A creditor does not need to sue your company first, wind it up, or exhaust its assets before turning to you. If the guarantee allows it, and most do, the creditor can simply demand payment from you personally the moment the company defaults.

Bankruptcy is where the consequences become life changing. If the judgment debt is $10,000 or more, the creditor can issue a bankruptcy notice under the Bankruptcy Act 1966 (Cth). If you do not pay or come to an arrangement within 21 days, the creditor can apply to make you bankrupt.

Once bankrupt, your divisible assets, including your share of the family home, vest in a trustee who can sell them to pay creditors. You are disqualified from managing a company under section 206B of the Corporations Act 2001 (Cth). Bankruptcy normally lasts three years and one day, but your name remains on the National Personal Insolvency Index permanently, and the bankruptcy stays on your credit report for years. For clients with pending visa applications, an undischarged bankruptcy can also complicate matters where financial capacity is relevant to the application.

When a guarantee is enforced, the family home is no longer off limits | Source: Pexels

Trap one: the guarantee outlives your involvement in the company. Selling your shares or resigning as director does not release you. If the guarantee is worded to cover future debts, you can be liable for orders the company places years after you left. You must obtain a written release or deed of release from the creditor. We have acted for clients pursued over debts incurred long after they thought they had exited the business.

Trap two: the guarantee is buried in another document. Supplier credit applications are the classic example. The form looks administrative, but the fine print above the signature block often contains an all moneys guarantee from the person signing. Read everything before signing anything on behalf of your company, and check whether you are signing as director only, or as director and guarantor.

Guarantees often hide in the fine print above the signature block | Source: Pexels

Trap three: signing for someone else's business. Parents guaranteeing a child's business loan, or one spouse guaranteeing the other's company debts, is a recurring source of hardship. The law does provide some protection here:

These cases are real protections, but they are fought after the fact, in expensive litigation, when the damage is already done. Independent legal advice before signing is far cheaper.

If a guarantee cannot be avoided, it can usually be improved. Four points are worth negotiating.

First, a cap on liability. Landlords in particular will often accept a guarantee limited to a fixed sum, such as six or twelve months' rent, or a bank guarantee or larger security deposit instead.

Second, a sunset or release mechanism. For example, release after two years of on-time payments, or automatic release when you cease to be a director.

Third, narrowing the scope. A guarantee for a specific loan or lease rather than all moneys.

Fourth, joint and several liability. Seek to remove it, or ensure every director shares the exposure equally.

If the creditor is a bank that subscribes to the Banking Code of Practice, you are entitled to receive key information and documents before signing, and the bank must generally allow you time to consider them and recommend independent legal advice. Take that advice seriously rather than treating it as a formality.

Finally, if you signed a guarantee years ago, dig it out and read it. Knowing your actual exposure lets you plan, negotiate a release while the relationship is good, and structure your personal affairs sensibly.

Sun Lawyers · Sydney Office

We regularly review commercial leases, loan documents, and supplier terms for business owners before they sign, and we act for guarantors who are being pursued by creditors. If you have been asked to sign a personal guarantee, have received a letter of demand under one, or simply want to understand what you signed in the past, contact our office for advice in English or Mandarin.

Phone: 02 9267 4988　｜　Email: enquiry@sunlaws.com

Sydney Office: Suite 703 & 704, 265 Castlereagh Street, Sydney NSW 2000

Website: sunlaws.com.au

This article is general legal information only and is not legal advice.
Please contact us for advice specific to your situation.