If you're in the business of supplying goods or services to other businesses, you'll find that many of your customers carry on business through companies. If any of those companies fail, while still owing you money, you might never receive the money owed to you, despite the obvious wealth of the company's owners.
What is a Director's Guarantee?
Except in certain circumstances, the shareholders of companies are not personally responsible for the company's debts. That is, unless you insist you will not give credit to the company until the individuals who run the company give their personal guarantee in respect of the company's obligations to you - a Director's Guarantee.
Directors can be required to sign as Guarantor for the obligations of their company but does this make an individual personally liable? As we have seen with the COVID-19 pandemic, no company is immune to financial distress. Personal guarantees should never be given lightly. In the video below, we look at 5 things you need to know about Director’s Guarantees.
Signing a Director’s Guarantee has vast legal and financial consequences. If the company is unable to meet its obligations, legal proceedings can be instituted against the director who signed as guarantor for the company. Legal costs can accumulate and judgement can be obtained against the guarantor personally which can involve the seizure and selling of personal assets.
Credit applications presented to companies to open accounts often incorporate Director's Guarantees. Director's Guarantees allow for effective recourse against non-compliant companies. If you supply goods or services on credit, ensure your businesses credit applications include valid Director Guarantee clauses drawn up by a professional.
Many guarantees allow for the registration of caveats over the real estate of the guarantor. These clauses are referred to as “Charging” clauses. Under the charging clause, guarantors give an interest in their property as security for the obligations owed by their company.
How Long do Director's Guarantees Last? Do they Expire?
As with personal guarantees, Director’s Guarantees generally have no time limit and do not expire. Resigning as a director of a company does not automatically terminate the Director's Guarantee. Normally a release from the creditor is required and the creditor doesn’t have to agree to that
How do I Obtain a Personal Guarantee from a Director?
When it comes to Director's Guarantees, the law requires that these be made in writing. At Argon Law we've found that the best place to obtain such a written guarantee is as part of a credit application that you require customers complete before you grant them credit.
If it's not already part of your business practices, we recommend that you change to require written guarantees for the directors of your corporate customers in every case. A lawyer can review your existing procedures and documentation or draft fresh documents for you to enable you to put in place binding guarantees from directors and shareholders of your corporate clients.
The Argon Law team has extensive experience in drafting such documentation and dealing with Director's Guarantees and other related matters, so if you have any queries about Director's Guarantee's or any other aspect of business law then please contact us on 07 5443 9988 or [email protected].
Argon Law is a Sunshine Coast law firm based in Maroochydore. We are commercial lawyers and property lawyers and are eager to assist you in any way we can so please don't hesitate to get in touch.
