Written by Gilbert Olzomer, Associate.

If you are a director of a company, your personal liability for transactions undertaken by the company is generally protected by what is known as the corporate veil. This means that should the company incur a liability, the rights of a creditor or plaintiff to take action are limited to pursuing the company only.

For this reason, many parties in commercial transactions and mostly those who are extending credit to corporations, seek personal guarantees from directors to secure that liability.

This arises because of the likely poor outcome a creditor will receive if a company is to enter liquidation, administration, receivership or otherwise be unable to pay its debts.

When will a Director’s Guarantee be sought?

A director’s guarantee will most likely be sought at the time an agreement for credit is entered into. Although the guarantee may appear as part of the documentation in a credit application, a guarantee, properly construed, exists as a separate agreement to a credit application/ credit agreement, comprising of different terms and between different parties, including the personal guarantors signing the document.

Most commonly, guarantees are sought to secure;
I. monies advanced under a loan;
II. credit provided for an ongoing trading relationship such as for the delivery of consumer goods like alcohol or milk; and
III. in tenancy agreements a guarantor will be required to guarantee payment and obligations of the company under the tenancy agreement.

If I provide the Guarantee, what does it mean?

A guarantee is a free-standing agreement and a guarantor will be bound (unless the guarantee can be set aside) by the terms and conditions contained in the guarantee to perform the outstanding obligations left by the company.

Where a guarantee is executed by two or more guarantors, a term commonly included is joint and several liability. This is where each guarantor is liable separately and also with the other guarantors for the principle debts owed by the company to the creditor. A creditor can pursue a single guarantor for the whole debt even in the presence of other guarantors having validly executed the guarantee.

“All monies” clauses are commonly included in guarantees in that a guarantor can be liable to a creditor, for a debt other than one to which the credit application relating to that guarantee specifically allows.

It is also important to note that guarantors may be liable for pre-legal recovery, collection and other legal costs incurred by the creditor in pursing the company/guarantor, as well as interest on outstanding amounts. This is often included in the form of an “indemnity” and in the case of small debts; the amount of interest, pre-legal recovery, collection and/or legal fees, could amount to more than the principle debt itself.

A guarantee may contain a charging clause which entitles the creditor to secure the guarantee over real property owned by the guarantor. This allows a creditor to register a caveat or mortgage over real property owned by the guarantor to secure the debt and without necessarily having first commenced proceedings. This will often act to stop the guarantor from selling or otherwise dealing with the property while the debt remains unpaid.

External Administration

Under section 440J of the Corporations Act a guarantee cannot be enforced during a period where the company is in administration, unless leave of the court has been granted.

Setting aside a Personal Guarantee

Because a guarantee is an agreement, it can be set aside and rendered void in the same way as other agreements.

These vitiating factors include:
– misrepresentation;
– misleading and deceptive conduct;
– mistake;
– duress;
– undue influence; or
– unconscionable conduct.

Further to this, section 7 of the Contracts Review Act 1980 enables a Court to set aside a guarantee if in the circumstances it would be unfair and unjust to enforce the guarantee. The most relevant application of the above vitiating factors is the rule in Yerkey -v- Jones (1939) HCA 3 (1939) 63 CLR 649 which was affirmed by the High Court in Garcia -v- National Australia Bank Ltd [1988] HCA 48.

The rule in Yerkey -v- Jones, is that equity will grant relief to a person who has signed a guarantee in support of their spouse’s business, if the following criteria are met:

I. the guarantor must be held to be a volunteer;
II. the company was wholly controlled and operated by the other spouse;
III. the guarantor did not stand to be benefit from the business transactions;
IV. the guarantee was sought by the spouse and without any direct dealings between the creditor and the guarantor; and
V. the guarantor did not understand the essential respects or nature of the guarantee and received no advice or explanation as to the type and extent of the agreement which was being executed.


In the current business climate creditors often find themselves the losers in insolvency and are unable to claw back funds from behind the corporate veil. With creditors becoming more risk averse, it only follows that where sophisticated creditors extend credit, guarantees will be sought.

It is often the case that if a guarantee is not provided, credit will not be extended, and your company’s chances of doing business with that creditor, will be impacted, if not prevented entirely.

If a guarantee is to be provided:

1. Ensure that a guarantee is capped to the smallest amount possible, which will minimise the amount sought down the track should the company fail to meet its obligations to the creditor.

2. Do not allow a charging clause.

3. Always ensure that once a business is sold or directors are changed, guarantees are withdrawn. The ways that a director’s guarantee can be withdrawn will depend on the terms and construction of the guarantee itself, however, always be sure to complete the withdrawal in writing and to get written confirmation or receipt from the creditor that the guarantee has been effectively withdrawn. It is often the case that until a guarantee is withdrawn, a person may still find themselves liable for debts of the company, even though their directorship and company involvement has ended.

4. Always seek prudent legal advice before signing any agreement including a guarantee.

If you have any questions regarding guarantees or if you are unsure whether you should provide a personal guarantee, please contact Uther Webster & Evans.