Reading time: 4 minutes

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 that you need to 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 is entering an agreement, such as a finance loan, lease or credit contract. They are more common in situations where the company may have limited assets. 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. It means you are liable for any debts under the agreement that the company can’t pay.

Dangers When Signing a Director’s Guarantee

Before signing a director’s guarantee, it’s essential you are fully aware of all your obligations under the guarantee. There are some hidden dangers that director’s guarantees can hold.

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 over which you have no control. 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

If your company can’t pay its debts, the creditor or other party to the agreement can take you to court as a director, under the director’s guarantee. If you don’t or can’t pay, the court may make a judgment that you are in the wrong. This will affect your credit rating. The creditor can also take steps to enforce the judgment, such as a warrant to seize property or bankruptcy, which could place your personal assets at risk.

3. Your Liability May Be Joint and 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’. This means the liability remains until the debt is paid in full, regardless of whether it’s paid by one or more of the directors. If the debt is paid by one director, the directors can then be liable to each other to sort out equal payment. It also means the creditor can choose to sue all of the directors for the debt, or just one. In a worst case scenario, if the other directors can’t afford to pay, you may be stuck with the full debt.

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 that 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 director’s guarantees to include a charge, giving the creditor an interest in any personal property the director owns. Also, director’s guarantees often include a protection to the creditor that the director will pay any legal or other costs that add up when the creditor is trying 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, director’s guarantees are usually continuing and unlimited. The obligations to pay the company’s debts will often continue even after you have stopped being a director.

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 personal finances or leave your personal assets vulnerable. You should get legal advice before signing a director’s guarantee to ensure you are aware of all your obligations. If you have any questions about director’s guarantees or need assistance with reviewing a director’s guarantee, you can contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.  

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Jodie-Thomson
Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards