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Suppliers asking a Business Owner or Director for a personal guarantee is a well-trodden path.
Whether it is a Lessor (landlord) asking a Lessee (tenant) or a supplier of goods, it is common practice for a personal guarantee to be given, even when there is a Company involved. A Guarantor is the person or entity guaranteeing performance of an obligation. This common practice may be advantageous for the Lessor or Supplier but has some significant impacts on the guarantor.
I have outlined the pros and cons of obtaining or signing a personal guarantee below by way of a simple scenario.
Background
ABC Plumbing is a plumbing company. They purchase their pipes from Pipes Pty Ltd. Pipes Pty Ltd have offered ABC Plumbing a 30 day account and request that a guarantee is given by the Director of ABC Plumbing.
Scenario
With Personal Guarantee
Without Personal Guarantee
If ABC Plumbing does not pay for the goods
Pipes Pty Ltd can seek payment from the Director and hold the Director personally liable.
Pipes Pty Ltd can only pursue ABC Plumbing.
If ABC Plumbing is sued by Pipes Pty Ltd
The Director of ABC Plumbing can be sued personally to recover the amount owing.
Pipes Pty Ltd can only sue ABC Plumbing for the unpaid invoices.
If Pipes Pty Ltd obtains a court judgment for the amount owing.
The Director can be made bankrupt.
This may include selling personal assets like his home, boat, cars or jewellery.
Pipes Pty Ltd can seek that ABC Plumbing be wound up and have a liquidator appointed but the debt remains for the most part with ABC Plumbing.
In essence, the giving of a personal guarantee by a Director of a Company, erodes the structural benefits of operating a company. The risk no longer stays with the company but is transferred to the giver of the personal guarantee.
The debtor can reach ‘behind’ the company and attack the Director personally by way of calling on the personal guarantee. This action then brings into the picture personal bankruptcy for the Director or Business Owner. This can have catastrophic consequences for the family asset base.
Key Takeaway
Personal Guarantees are great if you are a supplier (the Guaranteed) but are a terrible idea if you are the debtor or Guarantor.
Personal Guarantees are like a good steak. As long as you are the one cooking the steak and the not the cow, personal guarantees are great.
If you would like to have a steak at Chop House Parramatta (on us) to discuss how you or your clients are effected by personal guarantees then please email, jfrank@franklaw.com.au or call (02) 9688 6023.
