Personal Guarantees: Do you know what you are signing?
Our firm is frequently involved in litigation concerning personal guarantees. A familiar scenario is one where a company director is being pursued for the debts of the director’s company, pursuant to a personal guarantee provided by the director. In many instances, the director will advise that he or she did not realise they had in fact provided a personal guarantee.
You might ask: “how can that happen?”.
The primary cause is the director failing to read the finer details of a supply contract. In some commercial agreements, the provision of the guarantee may be quite subtle and might simply form part of the “fine print” (for example, the “terms and conditions of trade” on the back of a purchase order). There may not be any preamble about the provision of the guarantee by the director, nor any other reference to the guarantee – save for a clause which provides that the director is signing in his/her capacity as a director and in his/her personal capacity. In such circumstances, the director signing the document – even if only once – may easily be enough to bind the director to the guarantee.
The director might be saved from liability under the guarantee if it can be established that the director, as at the time of signing the guarantee, was not aware that a guarantee was being provided. If that is the case, the guarantee will not be binding. However, the director in question will likely find it very difficult to avoid liability under the guarantee. There may be difficulties in trying to establish the director’s level of knowledge at a particular point in time possibly some years down the track or the director may simply be unable to convince the Court that the requisite knowledge was missing.
Make sure you clearly understand the effect of any document you sign in your capacity as a director of a company, or obtain legal advice regarding the document prior to signing.