Written by Bruce Huynh in September, 2010

A Personal Guarantee is a legally binding agreement between a third party and a Creditor, whereby the guarantor is required to settle obligations of the Debtor toward the Creditor.

Personal guarantees are usually entered into by the Director/Directors of a Company agreeing to meet a debt owed by the Company to the Creditor when the Company is unable to meet their obligations.

A guarantee is usually entered into when a Company requires a credit facility or lease agreements by financial institutions or providers. The guarantee section is most commonly contained in the terms and conditions of the facility sought, however there may be on some occasions a separate individual document in relation to a personal guarantee may be provided.

The personal guarantee is a separate agreement between the Director and the Creditor. Therefore, Company does not have to be in Liquidation, or even insolvent, for the Creditor to pursue the Director.

If the Company goes into Liquidation this means that the Company has/will default and the Personal Guarantee can be exercised. It is further noted that the Creditor is not obliged to await the outcome of the Liquidation; they can pursue the debt immediately, regardless of any proposed distribution from the Liquidation.

In the case whereby the Company is placed into Voluntary Administration, the Creditor cannot exercise or seek to enforce the personal guarantee whilst the Company remains in Voluntary Administration. After the Voluntary Administration is terminated, the Creditor may seek to pursue the Director/s to meet any obligations the Company failed to satisfy.

If the Director is able to satisfy all the debt owed to the Creditor in relation to the guarantee, “subrogation” takes place, whereby the Director can assume any legal rights the Creditor may have had in respect of a particular claim over the Company. Therefore, the Director will be eligible to submit a Proof of Debt in relation to the debt they have paid out.

PLEASE NOTE: All information contained in the articles below was correct at time of publishing.