When a commercial debt is not paid, the first question a creditor typically asks is: who do we chase? If the credit agreement involves a company debtor and a personal guarantee from one or more directors, the answer is more nuanced than it might appear. The debtor and the guarantor are legally distinct, and the obligations — and the recovery process — differ between them.
The principal debtor
The principal debtor is the party who incurred the debt — typically the company that ordered the goods or services and to whom the invoice was issued. The obligation is primary: the creditor can sue the principal debtor directly, without first pursuing anyone else. A company debtor has the full range of corporate liabilities: it can be served with a letter of demand, a statutory demand, proceedings in a court of competent jurisdiction, and ultimately wound up if the debt meets the threshold.
The complication is that a company with no assets — or a company in administration or liquidation — may be an inadequate recovery target. This is precisely why the personal guarantee exists.
The guarantor
A guarantor is a person (or entity) who has agreed to be responsible for the principal debtor's obligations if the debtor fails to perform them. In most commercial contexts, the guarantor is a director of the debtor company who has signed the creditor's credit application in a personal capacity.
The guarantor's obligation is secondary in the sense that it is triggered by the principal debtor's default — but in Australian law, a properly drafted guarantee is typically a guarantee and indemnity, meaning the guarantor is also liable as principal debtor independently. This distinction matters: under a pure guarantee, the guarantor may argue they cannot be pursued until judgment is obtained against the principal debtor. Under a guarantee and indemnity, the creditor can pursue the guarantor concurrently with or independently of the company.
Joint and several liability
Where two or more directors have each signed a guarantee, they are often jointly and severally liable — meaning the creditor can pursue any one of them for the full amount, leaving that person to seek contribution from the others. This is commercially significant: if one director is asset-rich and another is insolvent, the creditor can focus recovery action on the former.
What voids a guarantee
Not every signed guarantee is enforceable. Common defects include: failure to comply with the Corporations Act 2001 (Cth) requirements for execution; signing in a representative rather than a personal capacity; undue influence or misrepresentation at the time of signing; and — for consumer guarantors — failure to comply with the National Credit Code. The guarantee must also relate to a debt that was actually incurred after the guarantee was signed.
The practical recovery sequence
In most cases, the recovery sequence is: issue formal demand to the company, issue concurrent demand to guarantors, commence proceedings against both if unpaid, and enforce against whichever party has accessible assets. The company and the guarantors can be named as defendants in the same proceedings.
If you hold a guarantee and are unsure whether it is enforceable or how to proceed, speak to Merion about your options.