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If you are entering into a commercial loan arrangement which 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. 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

personal guarantee means that the company fails to make payment in accordance with the loan document’s agreed payment schedule, their personal guarantor must cover the outstanding debt. 

A guarantor will usually be the director of the company or a family member. If you want to make the guarantee stronger, your agreement can also provide you with 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

In order to take the claim further against either party, 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,

  • 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; or
  • 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 judgement from the court. A default judgement is where the court will automatically find the dispute in your favour. 

When filing for a default judgement, you need to take enforcement action against both the company and the guarantor. Here, you will need to show evidence that both parties were served. You will also need to specifically outline the party names.

While the rules of service are technical and may seem unimportant, they are important. Even if the director of the company and the guarantor are the same person, if you are only able to serve the company, then you won’t be able to seek a judgement against the person themselves.

Enforcement

Once you have a judgement 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 means that you will be exercising your security interest under a mortgage and possessing their house.

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.

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.

As a general rule, the more options you have to recover the debt, the better chance you will have to recover what is owed to you. Once you have judgement against each party, you can choose the most cost-effective combination of enforcement options. 

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 which involves many payments over a long timeframe, you should consider:

  • whether the company 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. 

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. If you have any questions about the best ways to recover money from a company and a guarantor, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.

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