Personal guarantees and insolvency: a director’s guide

Have you provided a personal guarantee for your business? Are you now facing insolvency and concerned these debts will become your personal responsibility? 

You might not have given the guarantee much thought when you signed it – it’s a common part of running and growing a business. But if your company defaults on its obligations or enters financial distress, that guarantee can become a significant source of pressure and uncertainty.
This article explains how personal guarantees work, what happens to them if your company becomes insolvent, and – importantly – what options you have.

See our full guide: Are directors liable for company debts? Know your risk

What is a director’s personal guarantee?

A director’s personal guarantee – also called a personal guarantee or director’s guarantee – is a legally binding agreement where you, as a director, agree to personally repay a debt if your company can’t pay it.

In simple terms, it means a lender or supplier has another way to recover the money they’re owed if your business is unable to.

In a personal guarantee arrangement, your company is usually the principal debtor – the party that originally owes the money. You become the guarantor – the person who agrees to repay the debt if the company fails to pay.

Common situations for personal guarantees

• Taking out a business loan or overdraft

• Leasing commercial premises

• Setting up supplier accounts

• Financing equipment or vehicles

• Applying for business credit facilities

• Entering into a franchise agreement

• Securing trade finance

• Purchasing stock or inventory on credit

Importantly, a guarantee contract is a separate legal agreement from your company responsibilities under the Corporations Act 2001 (Cth) (the Act). You’re signing the guarantee in a personal capacity, not on behalf of your company.

While personal guarantees are often presented as a formality, they’re not. Once you sign, the guarantee can create significant personal obligations.

Creditors’ rights under guarantees 

Now to the big question: 

What can creditors actually enforce against you once you’ve signed a director personal guarantee?

The answer is: 

They may be able to make you – and any spouse or family member who co-signed – personally liable for the amount covered by the guarantee.
So, if your guarantee covers a $100,000 debt, you could be responsible for paying that amount, plus any interest and costs allowed under the guarantee.

How creditors pursue guarantees

1. Demand payment from you – The creditor may require you to meet your obligations under the guarantee.

2. Take legal action – If you fail to pay, the creditor can pursue you through the courts and obtain a judgment debt.

3. Enforce the judgment – Once they get a judgment, the creditor may seek enforcement against your personal assets, including bank accounts, real property or investments.

Guarantees with registered security interests

If the personal guarantee you sign is supported by security, the creditor may be able to enforce that security directly. This could include a mortgage over your home or a security interest over specific personal assets.

Under the Personal Property Securities Act 2009 (Cth) (PPSA), creditors can register security interests over personal property on the Personal Property Securities Register (PPSR) to help protect their position if the debt remains unpaid.

A personal guarantee for a commercial lease is different. It may make you personally responsible for unpaid rent and other amounts owed under the lease.

Personal guarantees in insolvency 

If your company becomes insolvent, you may need to consider formal insolvency options, such as voluntary administration (VA) or creditors’ voluntary liquidation (CVL).

It might be hopeful to think otherwise, but entering an insolvency process doesn’t make your personal guarantee disappear.

That’s because a personal guarantee is a separate obligation between you – the director – and your creditor.

Personal guarantees under administration 

If you enter administration, your company gets a short moratorium on some creditor actions. A moratorium is a temporary pause or restriction on specific actions creditors can take during the process.

Creditors generally can’t enforce personal guarantees given by directors during administration. But once administration ends, that protection may end.

Personal guarantees under liquidation

If you enter liquidation, the liquidator notifies your creditors, and your creditors lodge proof of debts so they can recover what they can from company assets. At the same time, your creditors can call on a personal guarantee and pursue you personally for the guaranteed amount.

Importantly, the amount the creditor can claim will depend on the terms of your guarantee, how much is recovered from your company during liquidation, and whether it has sufficient assets to repay its debts.

As a final point, personal guarantees are separate from other forms of director liability. A Director Penalty Notice (DPN) can create separate personal liability for certain unpaid pay-as-you-go (PAYG) withholding, superannuation guarantee charge and goods and services tax (GST) liabilities.

Options when facing a guarantee claim

If you’re facing a personal guarantee claim, it’s not necessarily a case of paying up immediately. You may have avenues to explore.

1. Negotiate with the creditor

Creditors sometimes prefer to get some money back rather than go through uncertain and lengthy court proceedings.

If you contact them early and offer a realistic payment proposal, you may get them to agree to a reduced amount, a payment plan or a release of the guarantee.

Note that they’re more likely to do this if their chances of recovering money from the liquidation are low.

2. Review the guarantee for defences (seek independent legal advice)

In some circumstances, you may be able to challenge a guarantee claim. Examples include where you were pressured into signing, taken advantage of, not given important information, or there were issues with the way the guarantee was prepared or signed.

Cases including Commercial Bank of Australia v Amadio and Yerkey v Jones have established important principles in this area. Just make sure you seek independent formal legal advice if you want to go down this route.

3. Enter a formal insolvency process

As we’ve already covered, entering voluntary administration or CVL doesn’t automatically eliminate a guarantee, but it does bring your company’s affairs into a formal process and can help clarify the amount the creditor may seek from you personally under the guarantee.

Read our full guide: Creditors’ voluntary liquidation process 

4. Bankruptcy as a last resort

If a creditor secures a judgment against you and you can’t pay, personal bankruptcy may ultimately follow.
Personal bankruptcy is a separate process from your company’s liquidation and is managed under the Bankruptcy Act 1966 by the Australian Financial Security Authority (AFSA). It applies to you personally, rather than your company.

However, bankruptcy isn’t an automatic outcome of a guarantee claim. It’s generally considered a last resort.

Need broader guidance? How to protect yourself as a director

Delay increases liability risk

Personal guarantees can be a real concern if you’re a director facing insolvency. They put your own finances and assets, including your family home, at risk if you’re unable to pay. 

Understanding exactly what they commit you to, how they unfold during formal insolvency processes, and what options you have as a business owner if a creditor pursues one can help you manage your risk – and make more informed decisions about guarantees in the future.