Can I File a Claim Against a Company and the Guarantor at the Same Time?

Summary

• A personal guarantee allows a creditor to pursue both the borrowing company and its guarantor simultaneously for the full debt amount under joint and several liability, without needing to exhaust enforcement options against the company before proceeding against the guarantor.
• After serving a statement of claim on both defendants (by post to the company’s registered address and by personal service on the individual guarantor), creditors can seek default judgment if no defence is filed within 28 days, then choose from enforcement options including winding up, bankruptcy proceedings, writs for property seizure, or bank account recovery.
• Creditors should assess the financial capacity of both the company and guarantor before commencing proceedings, weigh legal and enforcement costs against the likelihood of recovery, and consider alternative dispute resolution methods before initiating court action to preserve business relationships and reduce costs.
• This article is a guide to debt recovery against companies and personal guarantors in Australia, explaining the process for commencing proceedings, enforcement options, and strategic considerations for creditors.
• LegalVision is a commercial law firm that specialises in advising clients on debt recovery and commercial litigation matters.

Tips for Businesses

Obtain the guarantor’s address details and conduct a credit check before entering into any commercial arrangement requiring a personal guarantee. Include a clear costs clause in your loan or guarantee agreement to maximise the prospect of recovering legal costs if proceedings become necessary. Consider mediation or negotiation before commencing court proceedings to reduce costs and preserve commercial relationships where possible.

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On this page

• Personal Guarantees and Security Interests
• Debt Recovery Against Multiple Defendants 
• Should I Choose Liquidation or Bankruptcy Proceedings?
• Strategic Considerations
• Costs of Pursuing Multiple Defendants
• Joint and Several Liability
• Key Takeaways
• Frequently Asked Questions

When a borrower defaults on a commercial loan or lease arrangement, having a personal guarantee in place is only useful if you know how to enforce it. Understanding the process for commencing proceedings against both a company and its guarantor can make the difference between recovering your money and writing off the debt. 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.

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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 Judgment

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:

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.

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.

Costs of Pursuing Multiple Defendants

When you decide to pursue both a company and a guarantor for debt recovery, you need to factor in the costs involved. Court filing fees apply for each individual defendant you name in your claim, though filing against multiple defendants in one action is generally more cost-effective than running separate proceedings. You will also need to pay for service of documents on each party. 

Companies can be served by posting the document to its registered address, which is relatively inexpensive, but individual defendants such as guarantors must be served personally, which requires hiring a process server and can cost several hundred dollars, particularly if the individual is difficult to locate or tries to avoid service. A process server formally locates and delivers legal documents, such as court summons and statements of claim, to individuals or organisations. If you obtain judgment and need to enforce it, each enforcement method carries its own costs. For example, seizing property involves sheriff’s fees, whilst bankruptcy proceedings require you to pay court fees and potentially a trustee’s costs. 

You should weigh these costs against the amount you are owed and the likelihood of recovery. In some cases, you may recover your legal costs from the debtor if your contract or loan agreement includes a costs clause and you obtain a costs order from the court. However, even with a costs order, you can only recover what the debtor can actually pay. Pursuing both defendants simultaneously gives the best chance of full recovery, as you can choose to enforce against whichever party has more accessible assets. You can also use the threat of enforcement against both parties as a negotiation tool to encourage settlement without needing to follow through with expensive enforcement action.

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 judgment against both the company and the guarantor. If you receive a favourable judgment, 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, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced debt recovery lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee.  To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.

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