Personal Guarantees – A Creditor’s Safety Net?

[vc_row][vc_column][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

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