If your business supplies goods or services on credit, you are likely to encounter customers who are unable to pay your invoices when they fall due. In some cases, the company debtor may be insolvent. Here, they can be placed into liquidation, preventing you from taking debt recovery action. Before writing off the debt entirely, it is worth considering whether you can pursue a company director for the payment of the debt. This article looks at the circumstances where you can pursue a company director for a debt.

When Can I Pursue a Company Director?

You will only be able to pursue a director in relation to a company debt if that director has provided you with a director guarantee and the company has defaulted on its obligations. A director guarantee is also sometimes referred to as a personal guarantee. 

In simpler terms, a personal guarantee is a legally binding promise provided by an individual, who accepts full responsibility for the company debt if the company fails to make payment.  

Before pursuing a company director for a debt, you must consider whether the director has the ability to pay the debt. After all, there is little benefit in spending time chasing a director who has no means to pay you. It is also important to ensure that the personal guarantee is legally enforceable.

When Is a Personal Guarantee Legally Enforceable?

A court will take into account a number of factors when considering whether a personal guarantee is legally enforceable. Some of those factors include: 

  1. the wording of the contract and the guarantee as a whole. The title of the document is not decisive of whether the guarantee is enforceable. Similarly, using the word ’guarantee’ in a document does not necessarily make it a legally enforceable guarantee;
  2. whether the guarantee is in writing and signed by the guarantor;
  3. whether the director intended to be legally bound by the guarantee; and
  4. that it must be clear that the guarantor has a secondary liability to pay for the goods or services supplied, and that the primary liability rests with the company.

How Long Will a Director’s Guarantee Last?

In most instances, a director guarantee will have continuing and ongoing obligations. A director’s liability under a personal guarantee will continue even if the:

  • company has ceased trading;
  • company has been deregistered or wound up in insolvency; or
  • director who has provided the personal guarantee has since resigned as a director of the company.

A director cannot simply ‘opt-out’ of a personal guarantee once it has been provided.

When Can a Director Avoid Liability Arising From a Guarantee?

There are some of the common factors a court will consider when determining whether a guarantor can avoid liability under a personal guarantee, including:

  1. the guarantor claiming that the original contract, creating the primary obligation, is unenforceable, meaning that the guarantee is also unenforceable;
  2. that an unauthorised person placing a director’s electronic signature on a guarantee will not bind a director;
  3. if the obligations under the original contract are varied in a way that the guarantor would not expect, such as an extension on the period of time to pay or an increase in the amount to pay. Here, the guarantor may no longer be liable under the guarantee; 
  4. where an agreement provides for co-guarantors, and not all guarantors execute the agreement, the personal guarantee will not be binding on any guarantor; and 
  5. the guarantor may allege that there has been some misrepresentation, undue influence, common mistake or economic duress prior to entering into the contract.

Whether a defence such as these will be successful will depend on the evidence the guarantor provides to the court.

What’s the Process for Recovery?

Once it has been established that there is a legally enforceable personal guarantee, you can commence debt recover action. The general debt recovery process against a director is essentially the same process you would follow as if the director was responsible for paying the debt in the first instance.  

The initial recovery step will include issuing a letter of demand to the guarantor. If the director does not make payment in accordance with the letter of demand, or you cannot. reach a commercial settlement, you may need to commence formal debt recovery proceedings in a court of competent jurisdiction.

Key Takeaways 

If your customer is unable to pay their debt to you, you may be able to recover the debt from the company director. Pursuing a company director for a company debt is worth considering provided you: 

  • have a legally enforceable director guarantee; and
  • believe the company director has sufficient funds or assets to satisfy the debt owed.

If you are looking to pursue a company director for a debt, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.

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