Directors' Guarantees: What You Sign

Key takeaways

• A guarantee bypasses limited liability - your personal assets are exposed.
• Resigning as a director does NOT automatically release the guarantee.
• Most are unlimited and continuing - covering future facilities too.
• Get independent legal advice before signing. Every time.

What does a guarantee actually do?

A company is a separate legal person, and that separation is the point of incorporating: if the company fails, the debts are the company's, not yours. A guarantee is the lender undoing that for its own debt.

Once you have guaranteed, the lender can pursue you personally for the shortfall. That means your house, your savings, your other assets - subject to what security the lender also holds and what enforcement steps it takes.

Many guarantees are also supported by a mortgage over your home, which converts the guarantee from a claim into a secured claim. Those are different levels of exposure and the documents should be read to see which you are giving.

What are the traps?

Joint and several is the one that surprises people most. If three directors guarantee jointly and severally and two are insolvent, the lender can recover the entire amount from the third. Your exposure is not your share - it is all of it.

How do you get out of one?

Only with the lender's written release. This is the single most important practical point in this article: resigning as a director does not release you. People sell their share of a business, resign, move on, and discover years later that they still guaranteed a facility that has since gone bad.

If you are exiting a business, make written release from all guarantees a condition of the exit, alongside the share transfer. Do not accept an assurance that it will be handled. Get the lender's release in writing before you sign anything.

Other practical protections worth pursuing before signing:

• Independent legal advice - and independent means a lawyer who is not acting for the company or the other directors.
• A cap, expressed in dollars, rather than an unlimited guarantee.
• Limit to specific facilities rather than all monies.
• A notice obligation requiring the lender to tell you if the company defaults, so you learn about it early.
• Spouse guarantees deserve particular care - the Banking Code has protections for guarantors, and independent advice for a non-director spouse is essential.

This article is general information, not legal advice, and guarantees are individual documents. Have yours reviewed by a lawyer.

Frequently asked questions

Does resigning as a director end my guarantee?

No. A guarantee continues until the lender releases you in writing. Directors who resign or sell out and do not obtain a formal release remain liable, sometimes for facilities entered into after they left where the guarantee is a continuing one.

Can the bank take my house under a directors guarantee?

If the guarantee is supported by a mortgage over your home, yes, directly. If it is unsecured, the lender must first obtain judgment against you and then enforce, which can still ultimately reach your assets.

What is a joint and several guarantee?

Each guarantor is liable for the full amount, not a share. The lender can pursue whichever guarantor is most able to pay, which means you can end up covering the whole debt if the other guarantors cannot.

Should my spouse sign a guarantee?

Only after independent legal advice from a lawyer who is not acting for the business. The Banking Code contains protections for guarantors, and a non-director spouse guaranteeing business debt is a well-recognised risk area.

Related reading

• Secured vs Unsecured Business Loans: Which Should You Take?
• Business Acquisition Finance
• Business Loan Types: A Complete Australian Guide

Sources

• Banking Code of Practice - guarantees — Australian Banking Association
• Guarantees and directors duties — ASIC