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5 Dangers of Signing a Director’s Guarantee

In Short

  • Personal Liability: Signing a director’s guarantee makes you personally responsible for company debts if the company cannot pay.
  • Risk to Personal Assets: Creditors may pursue your personal assets, such as property, to recover unpaid debts.
  • Joint and Several Liability: If multiple directors sign, each can be held accountable for the full debt, not just a portion.

Tips for Businesses

Before signing a director’s guarantee, assess your company’s financial health and consider potential risks. Consult a legal professional to understand the implications fully. Negotiating the terms may help limit personal exposure. Always read the guarantee carefully to identify any ‘all moneys’ clauses that could extend your liability beyond the specific agreement.


Table of Contents

As a director of a company, you may be asked to sign a director’s guarantee when the company is entering an agreement. But what exactly is a director’s guarantee, and what obligations do you have when you sign one? This article will explain the dangers you must be aware of before signing a director’s guarantee.

What is a Director’s Guarantee?

A director’s guarantee is a personal guarantee, often signed by directors when a company enters an agreement, such as a finance loan, lease or credit contract. They are more common in situations where the company may have limited assets or when the Company’s obligations are substantial or ongoing. Therefore, the lender or other party wants extra protection to ensure that your company will pay any debts. Signing a director’s guarantee is a serious undertaking. This means you are liable for any debts under the agreement if the company doesn’t pay them.

How Do I Know If I Have Given a Directors Guarantee?

There are several ways to identify whether or not you have given a director’s guarantee. Some red flags to look out for to determine whether you are giving a personal guarantee include:

  • if a contract for the company contains a separate signature block for you to sign in your own personal name;
  • the document includes  a term or condition with the heading “Guarantee” or “Guarantee and Indemnity”; and
  • if you are personally named as a party to the contract.

1. You Are Liable If the Company Can’t Pay

Signing a director’s guarantee means you agree to be liable for the company’s debts under an agreement if the company can’t pay. This includes situations where the company stops trading in circumstances you have no control over. It is a binding commitment. Some director’s guarantees include an ‘all moneys’ guarantee. This extends your liability to debts the company owes beyond a particular transaction or agreement.

2. Your Personal Assets May Be at Risk

When signing a director’s guarantee, you must understand that you’re putting your personal assets on the line for your company’s debts. If the company fails to meet its financial obligations, you must pay off these debts using your personal assets.

If you cannot pay off these debts, creditors can pursue you personally to recover the debt, potentially putting your personal assets at risk. This means your home, savings, investments, and other personal assets could be vulnerable to seizure or forced sale. 

In the event of a court judgment against you, creditors may employ various enforcement methods, such as property seizure warrants or wage garnishment, to recoup their losses. Your credit rating could also suffer significant damage, impacting your future financial opportunities. 

The potential consequences extend beyond immediate financial loss, potentially affecting your long-term financial stability and personal life. Therefore, it’s important to carefully consider the implications and seek professional advice before signing any director’s guarantee, ensuring you fully understand the extent of the risk you’re assuming.

3. Your Liability May Be Joint & Several

If a company has more than one director, it’s common for all directors to be asked to sign a director’s guarantee. In these cases, the liability is shared between the directors (also called guarantors) and is called ‘joint and several’ liability.

When directors sign a guarantee with joint and several liabilities, it creates a flexible situation for the lender or third party:

  1. ‘”Joint’” means all directors are collectively responsible for the debt.
  2. ‘”Several’” means each director is individually responsible for the entire debt.

This arrangement gives the lender significant power:

  • They can pursue any single director for the full amount of the debt.
  • They can go after multiple directors simultaneously, in any combination.
  • They can recover portions of the debt from different directors until the full amount is paid.

For example, if there are three directors who signed a guarantee for a $300,000 debt:

  • the lender could demand the full $300,000 from Director A alone;
  • they could ask for $100,000 from each director;
  • they could pursue $200,000 from Director B and $100,000 from Director C; or 
  • any other combination that results in full repayment.

The key point is that the lender has complete discretion in pursuing repayment. They’re not obligated to divide the debt equally or to pursue all directors. They can choose based on which director(s) they believe are most likely to pay.

It’s important to note that while the lender has this flexibility, it’s up to the directors to sort out amongst themselves how to divide the liability fairly. This internal arrangement doesn’t affect the lender’s right to pursue any or all directors for the full amount.

You should keep in mind that if the creditor does come after you for the payment of the guarantee, you are also able to make a claim against the co-guarantors. This is referred to as ‘contribution’. However, before you do so, you must ensure that the co-guarantor has the available money or assets to assist with the claim payment. This means that if you are the only one with the assets in your name, you have the right to demand equal payment from the co-guarantors for their equal share in the debt arising from the claim.

4. There May Be Extra Costs and Charges

Director’s guarantees can vary in detail and complexity. The guarantee may include extra costs and charges you may not be fully aware of when signing. These costs may include onerous interest rates for unpaid debts. For example, it’s common for a director’s guarantees to include a charge, giving the creditor an interest in any personal property the director owns. Also, the director’s guarantees often include protection for the creditor, stating that the director will pay any legal or other costs that add up when the creditor tries to collect debts under the guarantee. This may include all costs of recovering the debt, including:

This could add a substantial amount of money to the debt owed.

5. The Liability May Be Continuing and Unlimited

Directors often think any obligation under a director’s guarantee ends after:

  • they stop acting as a director;
  • the agreement is terminated; or
  • the company stops trading.

However, the director’s guarantees are usually continuing and unlimited. The liability can last for an indefinite period, potentially years or even decades, after you cease being a director until the debt is fully repaid. The obligations to pay the company’s debts will often continue even after you have stopped being a director. It also means assets owned jointly with a spouse could potentially be pursued by creditors if your personal assets are insufficient to cover the debt.

Even if the company pays off its current debt, the guarantor’s liability doesn’t automatically end. The guarantee typically covers future debts, meaning the guarantor remains responsible for any new debts the company incurs after the initial repayment.

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Key Takeaways

Directors are often unaware of the full obligations they are committing to when they sign a director’s guarantee. If liability under a director’s guarantee is triggered, it can affect your finances or leave your assets vulnerable. Before signing a director’s guarantee, you should get legal advice to ensure you know all your obligations.

If you have questions about director’s guarantees or need assistance reviewing a director’s guarantee, our experienced business lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions 

What risks do I face when signing a director’s guarantee?
By signing, you risk using your personal assets, including your home and savings, to repay company debts. The liability may be unlimited and continue even if you leave the company.

Can a director’s guarantee affect joint assets?
Yes. Jointly owned assets, such as property shared with a spouse, may also be at risk if your personal assets are insufficient to cover the company’s debts.

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Jodie Thomson

Jodie Thomson

Practice Leader | View profile

Jodie is a Practice Leader in LegalVision’s Disputes and Litigation team. She has more than eight years of experience in commercial litigation, helping clients solve legal problems, ranging from contractual disputes to recovering debts, bankruptcy and corporate insolvency, and disputes involving employment issues, commercial leasing and franchising. Jodie also has experience appearing in the NSW Local, District and Supreme Courts and the Federal Court of Australia.

Qualifications: Bachelor of Laws, Bachelor of Arts, University of New England

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