Personal guarantees are a common part of doing business, especially for directors of small to medium enterprises. Whether it is for a commercial lease, a loan facility, or a trade account, directors are often asked to sign a personal guarantee in support of the company’s obligations.
But many business owners do not fully understand what they are signing — or the risks that follow if the company defaults. In this article, we explain what personal guarantees are, how they work, and why you should never sign one without legal advice.
What is a personal guarantee
A personal guarantee is a binding promise by an individual to pay or perform an obligation if another party, usually a company, fails to do so. In most cases, it is provided by a director or shareholder in favour of a landlord, lender or supplier.
The guarantee allows the creditor to pursue the individual directly if the company defaults, even if the individual had no personal involvement in the transaction or failure.
It is a separate legal obligation and usually survives company deregistration, liquidation or restructuring.
Common situations where guarantees arise
You may be asked to give a personal guarantee in connection with:
- Signing a commercial lease on behalf of your company
- Applying for a business loan or equipment finance
- Opening a trade credit account
- Entering into a supply or service agreement
- Acting as trustee of a trust and offering trust assets as security
Often the guarantee is contained within another document (such as a lease or credit application) and is not separately negotiated or explained.
What are the risks
If the company defaults and you have signed a personal guarantee, you may be held personally liable for:
- Unpaid rent or outgoings
- Outstanding loan amounts and interest
- Legal costs, enforcement expenses and penalties
- Damages for breach of contract
This liability is enforceable against your personal assets, including your home, investments and income. It can survive your resignation as director and may be enforced even after the company has ceased trading.
In some cases, guarantees also include an indemnity, which is an additional promise to compensate the creditor for any loss, regardless of whether the company is liable.
Are all guarantees enforceable
Not necessarily. A personal guarantee may be challenged if:
- It was not properly signed or witnessed
- The guarantor was misled or pressured into signing
- The document was unclear or ambiguous
- The guarantee was materially altered after execution
- The guarantor lacked capacity or did not understand the nature of the obligation
However, these defences are difficult to prove and rarely succeed unless supported by strong evidence. Courts generally uphold signed guarantees unless there is clear misconduct.
How to protect yourself
Before signing a personal guarantee:
- Read the entire document, including all schedules and attachments
- Ask whether the guarantee is limited (to a specific amount or timeframe) or unlimited
- Check whether your liability continues after termination or assignment of the contract
- Consider whether your spouse may also need to consent
- Ask for the guarantee to be removed or limited if possible
- Seek legal advice on the terms and alternatives
In some cases, a landlord or lender may agree to accept a bank guarantee or larger security bond instead of a personal guarantee.
Practical tip
Do not sign a personal guarantee as a formality or favour. It is a serious legal obligation that can expose you to personal financial risk long after the underlying deal is done. Always know what you are agreeing to, and seek legal advice before signing.
Disclaimer: This content is intended as general commentary and may not be applicable to your specific situation. It does not replace independent legal advice.
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