In Short
- A personal guarantee ensures that if a company defaults on a debt, the guarantor is responsible for payment.
- You can simultaneously pursue debt recovery from both the company and the guarantor.
- Obtaining a judgment against both parties strengthens your position in negotiations and enforcement.
Tips for Businesses
Before entering agreements involving personal guarantees, assess the company’s asset base and the guarantor’s financial stability. Ensure you have accurate contact details for both parties to facilitate legal proceedings if necessary. Prompt action in enforcing debts can improve your chances of recovery.
If you are entering into a commercial loan arrangement that involves regular repayments, such as loaning money or leasing property, it is important to consider what you will do if the other party does not make their payments. One safeguard you can put in place is to make the agreement conditional on the other party signing a personal guarantee. However, what happens if you actually need to enforce the guarantee? This article will explain how to commence proceedings against both a company and a guarantor if they do not pay back what they owe you.
Personal Guarantees and Security Interests
A personal guarantee means that if the company you enter into an arrangement with fails to make payment in accordance with the loan document’s agreed payment schedule, its personal guarantor must cover the outstanding debt.
A guarantor will usually be the company director or a family member. If you want to strengthen the guarantee, your agreement can also provide a security interest. For example, a security interest may be a mortgage or the ability to lodge a caveat over the guarantor’s house.
Debt Recovery Against Multiple Defendants
Cause of Action
Your agreement should define what constitutes an event of default and what action you can take upon this event.
For example, an event of default can be defined as missing a certain number of payments in a row and a certain number of days passing without a missed payment being rectified.
Here, your agreement may entitle you to recover the entire amount they owe. This may mean that they will pay all future weekly repayments in a single lump sum.
Filing a Claim in Court
When you file a court claim through a statement of claim, you can file it against multiple defendants at once. This means that you can make the same claim against both the:
- borrower company; and
- individual guarantor.
Service
Once filed, you will need to serve a copy of the filed statement of claim on both defendants. Different categories of defendants have different rules for service. For example, two categories are:
- Service on a Company: Here, you will need to post a copy of the filed claim to the company’s registered address. You can confirm their registered address by searching the company name or ACN on ASIC and purchasing a current company extract.
- Service on an Individual Guarantor: The document will need to be personally served on the individual. This is usually completed through a professional agent called a process server. Personal service can be difficult, particularly if you do not know the individual’s address or they deliberately try to evade service.
Default Judgement
Once the respective defendants have been served, they have a 28-day window to file a defence. If they do not file one, you can seek a default judgment from the court. A default judgment is where the court will automatically find the dispute in your favour.
When filing for a default judgment, you must show evidence that both parties were served.
Enforcement
Once you have a judgment against one or more defendants, you can choose which enforcement options to take against each party.
Here, you will have different options:
| Company | Individual | Either Company or Individual | |
| Enforcement Options | Insolvency proceedings where the company is wound up. | Bankruptcy proceedings or a writ for possession of real property. This is done through a court order that allows a sheriff to seize and sell property belonging to your debtor. |
Writ for levy for property. This means sending someone from the Sheriff’s Office to possess and sell their personal property to reimburse you. You could also recover money from the person or company’s bank account. |
Should I Choose Liquidation or Bankruptcy Proceedings?
Sometimes, enforcement proceedings against a company will not allow you to recover 100% of the money you are owed. This is because if the company defaulted on its payment obligations to you, it is likely that the company may be insolvent.
However, there is no way to know what the company’s balance sheet looks like beforehand. Rather, you will need to:
- apply to the court to wind up the company;
- have a liquidator appointed;
- lodge a proof of debt;
- have the liquidator wind up the company; and
- distribute the assets amongst you and any other creditors of the company.
Similarly, even though a personal guarantee provides you with more enforcement options, if the individual guarantor does not have assets or real property, bankruptcy proceedings may not be able to provide you with 100% of the money you are entitled to.
For example, if you enforce against the company and recover only 60% of the money owed, you can then enforce against the guarantor for the remaining 40% of the money owed.
This guide will help you to understand your corporate governance responsibilities, including the decision-making processes.
Strategic Considerations
Before you enter into a commercial arrangement that involves many payments over a long timeframe, you should consider:
- whether the company is likely to have assets to chase if they default on repayments;
- if not, whether you make the agreement based on the inclusion of a personal guarantee;
- whether you have the guarantor’s address details to arrange personal service; and
- what the guarantor’s credit history is.
The less likely you are to actually get a return on any legal proceedings in the event of default, the more risky the commercial agreement will be for you.
Joint and Several Liability
Joint and several liability is a principle that often applies in guarantee situations, meaning that both the company and the guarantor are independently liable for the full amount of the debt. It can give you flexibility in pursuing repayment, as you can choose to recover the entire sum from either party or a portion from each.
This is a legal obligation where multiple parties (two or more) can be held independently responsible for the entirety of a debt or obligation. This means that:
- you, as a creditor, can pursue any of the liable parties for the full amount of the debt;
- each party is individually responsible for the entire obligation, not just a portion of it; and
- if one party pays the full amount, they may have the right to seek contributions from the other liable parties.
Process
You are not required to first exhaust all options against the company before pursuing the guarantor. If the guarantor pays the debt, they typically have the right to seek reimbursement from the company. This type of liability provides strong protection for you as a creditor, as it increases the likelihood of recovering the full amount owed.
This also means that guarantors take on significant risk when agreeing to joint and several liability, as they could potentially be required to pay the entire debt even if they expected to be only a backup option. Understanding joint and several liability is crucial for both creditors and guarantors when entering into financial agreements or considering legal action to recover debts.
However, before initiating legal action, exploring alternative dispute resolution methods, such as mediation or negotiation, is advisable. These approaches may be:
- affordable;
- less time-consuming than court proceedings; and
- able to preserve business relationships.
Defences
Additionally, you should be aware of potential defences that guarantors might raise, such as:
- lack of capacity;
- lack of consideration;
- undue influence; or
- material changes to the underlying agreement.
It is also crucial to consider the actual financial capacity of potential guarantors before accepting their guarantee, as pursuing legal action against an individual with limited assets may prove fruitless.
Key Takeaways
If a party fails to pay their debts to you despite you chasing it up, you should move quickly and seek a judgement against both the company and the guarantor. If you receive a favourable judgement, you are in a strong position for any further negotiations with the debtor and the guarantor. However, it is also advisable to consider alternative dispute resolution methods before going to court, as this will help you maintain the business relationship.
If you have any questions about the best ways to recover money from a company and a guarantor, our experienced debt recovery lawyers can assist 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 1800 485 860 or visit our membership page.
Frequently Asked Questions
A personal guarantee is a legal promise by an individual (the guarantor) to repay a company’s debt if the company cannot pay. It provides additional security for creditors.
Yes, you can pursue recovery from both the company and the guarantor at the same time. This strengthens your chances of recovering the debt.
We appreciate your feedback – your submission has been successfully received.
