A personal guarantee is a legal commitment by an individual — typically a company director — to pay a debt owed by a company if the company fails to pay. It creates a direct obligation from the guarantor to the creditor, independent of the company's ability to pay. When the primary debtor (the company) cannot or will not pay, calling on the guarantee allows the creditor to pursue the individual instead.
Guarantees are only as useful as their enforceability, and many creditors discover after a company fails that the guarantee they took is not as straightforward to call on as they expected. Understanding what makes a guarantee enforceable — and what can undermine it — is the starting point.
What makes a guarantee enforceable?
For a personal guarantee to be enforceable against a guarantor, the following requirements must generally be satisfied:
- In writing and signed — under the relevant Statute of Frauds legislation in each state, a guarantee must be in writing and signed by the guarantor (or their authorised agent). An oral guarantee is unenforceable in most circumstances.
- Clear identification of the parties and the obligation guaranteed — the guarantee must clearly identify the guarantor, the primary debtor, and the obligations being guaranteed (the principal contract or credit facility).
- Signed before credit was extended — a guarantee taken after credit has already been provided is generally unenforceable as a guarantee for that existing debt, unless supported by fresh consideration.
- Not vitiated by misrepresentation, undue influence or unconscionable conduct — where a guarantee was obtained by misrepresentation, or where the relationship between the guarantor and the debtor gives rise to an undue influence argument, the guarantee may be voidable.
The Contracts Review Act — New South Wales
In New South Wales, the Contracts Review Act 1980 (NSW) gives courts the power to set aside or vary contracts, including guarantees, that are found to be unjust in the circumstances. The Act is particularly significant for guarantees given by spouses or domestic partners of business owners — the courts have historically been willing to set aside guarantees in these circumstances where the guarantor did not have independent legal advice and did not understand the nature and effect of what they were signing.
The practical implication: guarantors who can show they did not understand the guarantee, did not receive independent advice, and are in a category the courts have considered vulnerable may be able to resist enforcement. This is not universal — but it is a risk creditors should be aware of when taking guarantees from non-commercial parties.
Calling on the guarantee
When the primary debtor has failed to pay and you wish to call on the guarantee, the process is:
- Confirm that the primary debt is due and owing by the debtor company — the guarantee is usually conditioned on the primary obligation having been triggered.
- Confirm that the debtor has failed to pay — most guarantees require the debtor's default before the guarantee can be called on.
- Issue a written demand to the guarantor, specifying the amount owed, the basis for the guarantee obligation, and a reasonable deadline for payment.
- If the guarantor does not pay, proceedings can be commenced against the guarantor in the same way as against any other debtor — the guarantee creates a direct debt obligation.
What can the guarantor argue?
A guarantor may raise several defences, including:
- The primary debt is not owed — if the underlying obligation is disputed, the guarantee obligation may also be in question.
- The guarantee is unenforceable for one of the reasons above — not in writing, taken after credit was advanced, or vitiated by misrepresentation.
- The creditor has varied the primary contract in a material way without the guarantor's consent — significant variations to the principal obligation can discharge a guarantee.
- Hardship — not a legal defence, but a factor in negotiations.
This guide is general information only. It does not constitute legal or financial advice. The enforceability of personal guarantees depends on the specific document, the circumstances of its execution and the relevant state law — obtain qualified legal advice before acting.