Personal Guarantees – A Creditor’s Safety Net?

personal guarantee

It is common practice for suppliers to require a Director to guarantee the obligations of an applicant company prior to advancing any goods or services on credit to them (“the Guarantor”). This is what is commonly known as a personal guarantee.

More frequently, a common issue facing suppliers or creditors (“a Creditor”) who issue, process and approve high volumes of credit applications is ‘improperly executed guarantees’.

When properly executed, and on the basis that the terms of the guarantees are drafted correctly and are able to be enforced, a personal guarantee can offer additional security and potential recovery avenues to a Creditor if the applicant company is wound up or otherwise becomes insolvent.

Generally, for a guarantee to be enforceable, it will require three conditions to be satisfied (“the Guarantee”):
1. It must be in writing;
2. It must be signed by the Guarantor; and
3. It must be witnessed.

When a Guarantee has not been properly executed (and not reviewed prior to the provision of credit), the Creditor may later find themselves in a predicament if the applicant company is unable to meet its obligations and becomes insolvent or is wound up.
This article will look at the ability of Creditors to enforce Guarantees in circumstances where the guarantee was improperly executed or not executed at all.

Unexecuted personal guarantees

Directors of companies may still be liable under an unsigned guarantee, if the guarantee can be construed as forming part of the initial credit application. The theory behind this position is that, commonly, credit applications and guarantees are included in the one document and accordingly, the execution of one section should be construed to be an execution or an agreement as a whole (including the guarantee).

In Alonso v SRS Investments (WA) Pty Ltd [2012] WASC 168 [58] , the Western Australian Supreme Court considered certain practices and whether they could be construed as a director showcasing their ‘objective intention’ to be bound by a guarantee. Particularly:

1. Whether the guarantor is specifically identified within the particulars of the agreement or if it can be argued that the guarantee provisions applied to the guarantor directly in plain terms;

2. Whether the guarantor’s signature has been witnessed. It was argued that there would have been no purpose for the potential guarantor’s signature to be witnessed if they had not intended to be personally bound;

3. Whether there were handwritten amendments or initials signifying that the guarantor had exhibited an intention to be bound by the amended or initialled sections; and

4. Whether there is any correspondence from the guarantor relating to the agreement on or about the date of signing the agreement.
Despite the position put forward by the above case, such a proposition would only occur in rare circumstances and generally, the Queensland Courts would be unlikely to take such a view.

Improperly executed personal guarantees

A personal guarantee given by an independent third party (for example a family member of the Director) may be set aside if the Court considers that the guarantee was unjustly obtained through misrepresentation, unconscionable conduct or the exercise of undue influence over the guarantor leading up to or during the execution of the guarantee.

Generally, for relief to be granted (and the guarantee set aside), it must be shown that the stronger party (usually the creditor) exploited the guarantor’s disadvantage to procure the security for the applicant company.
In Commercial Bank of Australia Ltd v Amadio (1983) 46 ALR 402 (“Amadio”), the Court took into consideration whether the creditor knew or ought to have known about the misrepresentation of a material fact which induced the guarantee. In Amadio, the Full Court decided that the bank’s behavior was unconscionable as it took deliberate steps to conceal the Defendants’ son’s true financial situation from them prior to their execution of the guarantee (which directly influenced their decision to provide the guarantee to their son).

In light of the recent expose of unsatisfactory banking practices during the Royal Commission, if a similar matter was before them, it is likely that the judiciary could possibly be swayed to take a harder approach to such unscrupulous practices.

Minimisation of risks associated with unexecuted or improperly executed Guarantees

As a means of mitigating any potential losses, as well as minimising potential disputes arising from unexecuted guarantees (especially when a creditor subsequently attempts to rely on it), parties should take care to ensure that credit applications and guarantees are fully and properly executed prior to the provision of credit.

Should you require assistance in reviewing your current guarantee (or corresponding credit application) to further safeguard your rights when providing credit to companies, please contact our office on 07 3009 8444 to discuss further.

10 Golden Rules of Credit Control

Credit Control

1. Consider whether you need to provide credit in the first place

Many businesses will provide credit without considering whether their clients require or expect it. Even worse, many businesses become unwilling credit providers. Have you ever delivered stock, cash on delivery, and not been paid at the time of delivery? Have you ever accepted a personal or company cheque? The first step to effective credit control is to consider whether your business will provide credit and if so, to whom and on what terms.

2. Establish your terms of trade

Your terms of trade are the rules upon which you are prepared to do business and provide credit and, structured correctly, form the basis of any contract of sale. Your terms of trade need to be made aware to the client prior to the time of purchase and ideally should be acknowledged by the client in some way (for example; initialled and dated). At the very least, your terms of trade should consider: price; terms of payment; warranties/conditions of purchase; limit of liability; title (when does it pass?); interest/administration fees; costs recoverable; security for payment; what constitutes default and its effect; termination.

Every business is different and may require specific considerations. It is recommended that you consult with a professional in the development of your terms and conditions.

3. Establish who you are dealing with

Whilst this sounds elementary, it is not as simple as it sounds. If you are providing credit, you ought to require proof of identification and proof of ability to pay. At the very least you should insist on identification and trade references. Anybody can print a business card! Take a photocopy of the ID and actually telephone the referees.

You should undertake a business name search and/or company search to confirm the accuracy of the information provided by the client. Both of these searches can be undertaken for a small fee at

4. Use a credit application and personal guarantees.

A well designed credit application, incorporating directors’ personal guarantees will be invaluable if it is necessary to take legal action to recover a debt. Ideally, your credit application will also incorporate your terms of trade. At the very least, your credit application should require the following information: full name and address of the client including business name, ABN. For a company, include the ACN and full names and addresses of the directors.

Depending on the limit of credit to be extended, you may require evidence of ability to pay, such as the provision of financials or a letter of credit from the client’s banker.

  • You should set a credit limit based upon the risk of each client and your cash flow requirements.
  • A directors’ guarantee should be drafted by a solicitor.

Beware, a one paragraph guarantee is most likely unenforceable.

10 Golden Rules of Credit Control5. Secure your debt

If a client is not paying your accounts, it is likely that other creditors are in the same boat. In many cases, the difference between being paid or not, depends upon whether you, as the creditor, hold security over a debtor’s property (personal or real). Ensuring that your terms of trade include a properly drafted retention of title and/or charging clause may set you apart from other creditors and will give you the ability to caveat and/or sell a debtor’s property.

6. Use a System – Review your accounts regularly

You should create and use a system to monitor your invoicing and collection. Regular invoicing and follow up is essential to good cash flow. Always know how much credit you have extended to your clients and do not extend beyond credit limits without making a conscious decision about the risks.

7. Avoid special cases

Making special arrangements can backfire. No client is so large or important that you should let them ignore your terms. Insisting that your clients comply with your terms will create a healthy respect for your business, rather than damage your goodwill. If a client is unable or unwilling to comply with your terms, you should ask why. It may only take one exception to drain your cash flow.

8. Classify bad debt from slow payers

Identifying bad debts from slow payers is critical when making a decision as to how you are going to deal with a debtor. Once you have identified a bad debt, you should deal with it in a methodical and legal manner. Slow payers may simply need a push and a reconsideration of credit limit. Before embarking upon collection of a debt, make a decision on whether you wish to keep the business relationship intact.

9. Have a plan to collect bad debt

Integrating debt collection into your general accounting system will reap instant rewards. Generating collection letters and telephoning clients at scheduled intervals is recommended (ex. 14, 30 and 60 days).

If a debtor makes a promise to pay by a certain time, make a note of it and diarise the matter for a follow up telephone call if the promise is not fulfilled.

Telephone calls or personal visits are more effective than letters.

10. Don’t be afraid to outsource a debt to a professional

Collection agents are professionals, are required to be licensed and are trained in the collection of debt. A good collection agent will be able to help you with identifying which debts are collectable and which debts should simply be written off.

Many collection agents will now act on a speculative basis, charging a percentage for collections recovered.

Has your company been served with a Statutory Demand?

If your company has been served with a creditors statutory demand for payment you must act with urgency, as allowing it to expire can cause irrevocable harm.

The most simple way that a company can be wound up and liquidators appointed is when an application is brought after the expiry of a statutory demand.  The statutory demand allows 21 days from service within which the recipient company must satisfy the creditor of the amount contained therein, or otherwise bring an application before the Court to have the demand set aside on grounds of the demand being defective or that there is a genuine dispute in relation to the debt.

Should the company fail to comply with the demand, by making full payment of the demand within 21 days or by applying to have the demand set aside, a company is deemed to be insolvent and a creditor may make an application to the Court to wind up the company.  No further evidence is required to prove insolvency.

For a company that may be asset rich but suffering from a temporary lack of liquidity, 21 days to comply with a statutory demand will often not be enough time in which to realise some of its assets and to make good on the demand.

Companies can attempt to oppose a winding up application on the basis that the company is in fact solvent.  This is a complex application to bring before the Court as it involves, amongst other things, overturning the presumption of insolvency.  A more effective approach is to deal with creditor who issued the statutory demand within the 21 day period to ensure that the presumption of insolvency does not arise at all.

If a company has been served with a demand and it does not consider that it owes the debt or that there is an irregularity in the document it may apply to the Court have the demand set aside.  However, this application must be made within 21 days and there is a large volume of case law that indicates the Court treats the 21 days in the strictest of terms.

Alternatively, if your company does owe the debt raised in the statutory demand, it is often beneficial to seek advice with a view to formally approaching the creditor’s legal representatives on a ‘without prejudice’ basis to attempt to negotiate payment terms, allowing for further time outside of the 21 day limit.

If your company has been served with a statutory demand, contact us for advice in relation to the most appropriate response for your circumstances.

Q&A: Using Caveats Over Real Property in Debt Collection

Using Caveats Over Real Property in Debt Collection FAQs

Common questions and answers for using caveats over real property in debt collection…


What is a caveat?

A caveat is a formal notice lodged on real property, which stops any person (including the registered proprietor) from dealing with the real property.

Who may lodge a caveat?

Any person claiming an estate or interest in land.

Does Judgment give me a caveatable Interest?


What is necessary to establish an Interest?

An actual interest in the property itself (some relation between the debt and the property).

It is not intended to provide an exhaustive list, but some common examples may include:

  • Equitable mortgagee or chargee
  • Purchaser under a contract of purchase
  • A husband or wife or partner (defacto)
  • Lessee
  • Beneficiary under a trust
  • A victim of fraud

What is an Equitable Chargee?

Where the debtor agrees to charge their real and personal property with the payment of a debt, the creditor becomes an “equitable chargee”; “equitable” in this sense meaning “unregistered”.

For example:
“The guarantor charges as beneficial owner and trustee of every trust all the guarantor’s land (including land acquired in the future) in favour of Bunnings to secure the payment of the moneys and the performance and observance of the guarantor’s covenance under this deed.”

(See Bunnings Building Supplies Pty Ltd -v- Blue Diamond Homes Pty Ltd [2004] QSC 54)

Note: Check the credit application and any guarantee documents.
If you are unsure whether or not your client is an equitable chargee, ask your friendly solicitor.

What is the procedure for lodging a caveat?

  • Confirm the existence of the debt
  • Confirm the caveatable interest (check the charging clause)
  • Lodge caveat (your friendly solicitor does this)
  • Notify other interested parties (Registrar does this)
  • Within 3 months of registration, commence legal proceedings (Supreme Court)

What if I don’t issue legal proceedings?

The caveat will lapse after 3 months. You may only caveat once.

Why use a caveat instead of a writ?

Caveat may be lodged immediately the debt becomes owing, whereas a writ requires a judgment.

Other matters to note about caveats

  • Be careful and always seek advice on whether there is an equitable interest
  • Conduct searches to ensure there is equity in the property
  • There are obvious costs risks if you get it wrong (Supreme Court)
  • A charging clause (and therefore a caveat) will not give priority over registered mortgages and perhaps future liquidators. A specific charge should be drafted for this.

Consent Caveats


What is a consent caveat?

The registered proprietor may agree to the lodgement of a caveat on the property, despite no pre-existing caveatable interest. A consent caveat will remain on the title even after the 3 month expiry period.

Debtor owes $10,000.00 and agrees to pay it back at $2,000.00 per month.
Creditor agrees, but wants security.
The Parties may agree that, instead of a registered mortgage, a consent caveat will be lodged.
A settlement agreement may be executed, charging the property and the consent caveat lodged.

What is the effect of the Consent Caveat?

Debtor may not transfer or re-finance the property without paying the debt or obtaining the creditor’s consent.

If you have additional questions about caveats over real property in debt collection, we can help.