Personal guarantees are a standard feature of commercial credit — directors of customer companies sign guarantees making themselves personally liable for the company's debts. They are taken seriously at the outset and, in many cases, forgotten about until the company cannot pay. When the guarantee is needed, the process of enforcing it has specific steps, and the outcome depends on the guarantee's terms, the guarantor's financial position, and how quickly the creditor acts.
Step 1: Review the guarantee document
Before anything else, locate and review the original guarantee. Check: Is it signed by the guarantor (and witnessed where required)? Does it cover this debt — is the debt within the scope of the guarantee? Is there a limit on the amount guaranteed? Is the guarantee conditional on demand being made on the company first? Does it contain any restrictions or conditions that must be satisfied before the creditor can call on the guarantee?
Guarantees that are not signed, not witnessed as required, or that require conditions precedent to enforcement must be dealt with accordingly before proceeding. A guarantee that looks complete may have technical deficiencies — legal review of the document before relying on it is worthwhile for significant amounts.
Step 2: Formal demand on the guarantor
Issue a formal demand on the guarantor personally, stating the amount outstanding (and how it is calculated), referencing the guarantee and the company's failure to pay, and giving a clear deadline for payment. The demand should be served in the manner specified in the guarantee — typically by post to the guarantor's last known address, or personal service.
The demand starts the clock on the guarantor's opportunity to pay and on any limitation periods for proceedings. If the guarantee requires demand to be made within a specified period after the company's default, ensure the demand is made within that time.
Step 3: Assess the guarantor's financial position
Before committing to legal proceedings, assess whether the guarantor has assets worth pursuing. Search property registers for real estate ownership, ASIC for directorships (which may indicate other income sources), and PPSR for any existing security interests over the guarantor's assets. A guarantor who is personally insolvent or judgment-proof — no reachable assets — may not justify the cost of proceedings.
Step 4: Proceedings and judgment
If the guarantor does not pay in response to demand, proceedings are commenced in the appropriate court based on the amount. An undefended guarantee claim proceeds to default judgment relatively quickly. A defended claim requires the guarantor to file a defence identifying specific grounds — common grounds include non-disclosure by the creditor, material variation of the guaranteed obligation without the guarantor's consent, or alleged invalidity of the guarantee itself.
Step 5: Enforcement of judgment
A judgment against a guarantor is enforced using the same mechanisms as any judgment debt: garnishee orders against bank accounts, writs of execution against personal property, and in some states, orders charging real property. For a guarantor with equity in real property, the judgment may ultimately be recovered through forced sale.
Contact Merion if you need to enforce a personal guarantee — we can advise on the process and take the necessary steps to pursue the guarantor on your behalf.