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Personal-guarantees

Newsletter 4
Practice Note: 25/08/2021

Personal Guarantees – Traps to Avoid – Addendum

 

We recommend that a personal guarantee should not be signed without first obtaining legal advice.

Below are examples of how a personal guarantee can be limited:

a) It is increasingly common for personal guarantees to have a charging clause giving the creditor the right to have a charge over any real property the director owns or may own in the future. An example of a charging clause is provided below:

I/we agree to charge my / our interest and estate in all land presently held or hereafter acquired by myself/ourselves to better secure the performance of the applicant of these terms and conditions and I/we hereby consent to the lodging of a caveat by you on all Certificates of Title to any land so held by myself/ourselves.

Deleting a charging clause does not require a new personal guarantee to be prepared. The charging clause can be deleted by ruling it out and initialing the change, as demonstrated below:

I/we agree to charge my / our interest and estate in all land presently held or hereafter acquiredJB

 by myself/ourselves so as to better secure the performance of the applicant of these terms andJB conditions and I/we hereby consent to the lodging of a caveat by you on all Certificates of Title JB     to any land so held by myself / ourselves. JB

b) It is our view that a personal guarantee should only be given up to a dollar limit and have an expiry date. An example on how a personal guarantee may be limited by dollar amount and date is provided below:

Signed:  Joe Bloggs   This guarantee is signed solely on the basis that it has a dollar limit of $xx,xxx and expires on xx/xx/xxxx. Joe Bloggs

TIP: The terms of a personal guarantee should be properly considered, understanding the impact on the company and the director if the personal guarantee is triggered.

Personal guarantees can vary greatly. It is unwise for the company director to sign a personal guarantee without understanding the implications for the company and the director if the personal guarantee is triggered.  Below are examples of possible items that a director may seek legal advice on.

  • The interest rate to apply if the personal guarantee is activated. If the personal guarantee has a high penalty interest rate it should be reduced to a commercial interest rate.
  • Whether the personal guarantee requires the guarantor to pay the supplier\’s legal fees to collect the debt from the guarantor. This type of clause should be deleted or be limited in amount.
  • What event triggers the personal guarantee and whether that event would be extraordinary in the day-to-day business of the company. For example, it would be unreasonable and disruptive for the company if the personal guarantee is triggered if the company\’s account goes beyond 30 days.
  • Whether the personal guarantee has a charging clause on any real estate the director owns, now or in the future, and if so, for the charging clause to be deleted from the personal guarantee.
  • Applying a dollar limit to the personal guarantee.
  • Applying an expiry date to the personal guarantee.
  • Including in the personal guarantee that the personal guarantee expires when the person ceases to be a director of the company.

COMMENT: We have observed suppliers accept a personal guarantee where clauses had been ruled out and conditions inserted in the director\’s handwriting.

COMMENT: In the advent of financial hardship, unreasonably aggressive personal guarantees can limit the potential for the company to be saved and cause the director to become insolvent.