A common feature of the onboarding process for many suppliers is a personal guarantee taken from an owner or director of the company customer. These personal guarantees can lie dormant for months and years on end until the customer can’t (or won’t) pay any longer.

At FCW Lawyers, we frequently act for clients looking to enforce their personal guarantees. The time that we get involved is often when the raft of excuses come rolling in, too. “I never signed a personal guarantee”, “That’s not my signature, someone must have forged it.” “You extended my credit limit past what was on the credit application.” “I’ve got no assets.”   

That’s just on any normal given day. But in the current economic climate, you won’t just be facing a raft of excuses – you’ll be facing a torrent.

To help yourself survive the tidal wave of excuses from guarantors and make sure your personal guarantee is worth the paper it’s written on, ask yourself these five questions:

1. Did you notify the guarantor?

When you accepted the guarantee, did you notify both your customer and the guarantor in writing? If not, there’s no better time to start. It might just help you overcome excuse numero uno – “I don’t remember giving a personal guarantee” and “that’s not my signature”.

We recommend that all our clients review their standard procedures for notifying customers and guarantors that the credit application and guarantee has been accepted and the credit account has been opened. Take care to write specifically to the guarantor once the documents have been accepted. This is particularly important where the guarantor is not involved in the day-to-day running of the business. Why not also consider sending separate copies of the guarantees to the guarantors at the same time as you notify the customer they’re onboarded?

2. If you have a multiple company structure, are all the companies included?

Many suppliers will list their parent company and their subsidiaries as the entities that are taking the personal guarantee. But how long has it been since you looked at those? Has your business undergone any restructures or name changes in that time? Are all the entities listed that need to be? If not, your personal guarantees could be out of date.

For example, say you took a personal guarantee from a customer in the name of Machine Sales Pty Ltd in 2016. A few years later, the same customer starts trading with your subsidiary Machine Repair Pty Ltd, but it is not listed in your personal guarantee. The guarantee may not apply to the debts owed to your subsidiary.

We recommend carefully reviewing the entities listed in your personal guarantees and updating them where necessary. We also recommend using language such as “including but not limited to” so that you still have some ammunition if you get hit with excuse #2 – “I didn’t guarantee that specific company’s debt.”

3. Is the guarantee written in plain English and does it display a warning to get legal advice?

One problem with personal guarantees is the psychology behind them – many guarantors believe that they will never have to reach into their own pocket and put money up. It’s too hard to read and it’s just another document to be signed in the application or onboarding process.

We recommend plain English guarantees with clear warning labels about it being an important legal document. This will help to alert guarantors that they need to read and understand the document more carefully. It will also help you later on if guarantors start saying things like “I never had the opportunity to get independent legal advice”.

4. Check the witness

We recommend to all of our clients that personal guarantees be in the form of a Deed. This is because a Deed is a particular type of legal document that has certain benefits over other types of agreements. But to be binding, there are certain technical requirements of Deeds which some guarantors cling onto to get out of payment.

For example, the Conveyancing Act (NSW) requires Deeds to be attested by at least one witness who is not a party to the deed. But what if you have a personal guarantee that hasn’t been witnessed?  Can it still be enforceable as a contract, but just not a Deed?

Ideally, if you receive a Deed that has not been witnessed, you should return the document and ask the guarantor to have his or her signature re-witnessed. Where that is not possible, you will have to argue that you have an enforceable agreement, just not a technical Deed. Every reason to dot your I’s and cross your T’s from the very start.

5. Don’t forget bank account details

Once upon a time, if you had a judgment against a customer you could apply to the Court for a garnishee order for debts on each of the five major banks. You didn’t need to give the Court specific bank account details for the judgment debtor. Chances were you could stumble upon your customer’s bank account to satisfy your judgment.

Now, times have changed and the Court must be satisfied that you have grounds to believe that a particular bank is holding money owed to you. You need to explain the steps you took to identify the debt, which usually involves naming a specific bank account and how you obtained those details.

The best way to do that is to take the bank details for your customer and any guarantor in your application or onboarding process. If that’s not possible now, look back through your records to see if any previous payment remittances give you the same details.

Key Takeaway

There is no point asking your customers to sign personal guarantees if you can’t use them to your advantage when you need it. Make sure you review not just your personal guarantees, but your process for accepting them and onboarding your customer so that you have the best protection possible.

Disclaimer

This article is designed and intended to provide general information in summary form. The contents of this article do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as legal advice. Please seek legal advice about your specific circumstances.