Most commercial credit is extended to companies — entities with limited liability that can fail, be deregistered or wound up, leaving creditors with nothing. A personal guarantee pierces that corporate veil: it makes the director personally liable for the debt if the company cannot pay.
A properly executed personal guarantee is one of the most valuable protections a trade creditor can hold. An improperly taken one may not be worth the paper it is printed on.
What is a personal guarantee?
A personal guarantee is a legally binding commitment by an individual — typically a director of the company receiving credit — to pay a debt if the company defaults. It creates personal liability that exists independently of the company's financial position.
When the company fails to pay and a guarantee is in place, the creditor can pursue the guarantor as an individual — seeking payment from their personal assets, including (subject to limits) their home, savings and other property. The guarantee does not replace the company's liability; it adds a personal liability alongside it.
Why it matters
Without a guarantee, a creditor extending trade credit to a company is an unsecured creditor. If the company is wound up, the creditor stands in line with all other unsecured creditors — and typically receives cents in the dollar, or nothing.
With a personal guarantee, the creditor has an additional avenue of recovery that is independent of the company's insolvency. Even if the company is liquidated and returns nothing, the guarantor remains personally liable and can be pursued separately. This changes the risk calculus significantly, particularly for larger accounts.
Getting it right
A personal guarantee is only effective if it is properly executed. The key requirements are:
- In writing — a guarantee must be in writing to be enforceable.
- Signed by the guarantor — the director must sign, not someone signing on their behalf without authority.
- Witnessed — most guarantee forms require a witness signature. The witness should not be the creditor or another guarantor.
- Independent legal advice — while not always a strict legal requirement, providing the guarantor with an opportunity to obtain independent legal advice — and noting that on the document — significantly reduces the risk of the guarantee being challenged on the grounds of unconscionable conduct or undue influence.
- Clear scope — the guarantee should clearly state what debts it covers (all debts up to a cap, or specific accounts), and whether it is a continuing guarantee (covering future debts as well as existing ones).
Pursuing a guarantor
When a company fails to pay and a guarantee is in place, the creditor may pursue the guarantor directly. This does not require waiting for the company to go into liquidation — if the company has defaulted on the debt, the guarantee is generally triggered. You can send a demand to the guarantor in the same way as to any other debtor.
If the guarantor does not pay, the usual legal remedies are available: tribunal proceedings (within monetary limits), court proceedings, and judgment enforcement. The guarantor's personal assets — bank accounts, motor vehicles, real property — may be available for enforcement, subject to applicable exemptions.
Limits on guarantees
Not every guarantee is enforceable in full. A guarantee may be challenged — and potentially set aside — on grounds including:
- The guarantor did not understand what they were signing.
- The guarantor was under duress or undue influence (particularly relevant for domestic guarantees).
- The guarantee was procured by misleading or deceptive conduct.
- There was a material misrepresentation about the nature of the debt covered.
Guarantees with a cap on the guaranteed amount, or that cover only specific debts, may not extend to later or larger liabilities. Check the scope of your guarantee carefully before pursuing a guarantor — a solicitor can advise on enforceability.
Alternatives to guarantees
Where a director will not give a personal guarantee, other risk mitigation options include:
- PPSR registration — for goods suppliers, a registered security interest may provide priority in insolvency even without a guarantee.
- Reduced or prepaid credit — limiting exposure to an amount you can afford to lose, or requiring payment upfront or on delivery.
- Trade credit insurance — insurance against non-payment by customers, available through specialist insurers.
- Retention of title — preserving ownership of goods until paid, supported by a PPSR registration.
This guide is general information only. It does not constitute legal or financial advice. For advice specific to your situation, consult a qualified professional.