The majority of the time when a company is applying for credit, whether a loan from the bank or for an account with a supplier, the credit provider will require a personal guarantee and indemnity from the directors of the company.
The personal guarantee means that you are personally responsible for the obligations of the company to repay all monies owed by the company to that bank or supplier (including interest and costs of the lender, which in the case of a default can be high). Sometimes there is a limit on the guarantee and the lender cannot pursue you for more than the limit amount, but that limitation is rare. An indemnity in favour of the lender or supplier is usually given in addition to the personal guarantee, indemnifying the lender against any loss. This means that you will have to pay, regardless of the company’s obligations to pay. For example if it was found for any reason that the lender or supplier could not recover from the company, your personal guarantee and indemnity would mean that regardless of this you would still be obligated to pay the monies owed. It can also limit your ability to borrow in your own name.
We always advise our clients not to provide a personal guarantee and indemnity. Whether you are able to negotiate for this requirement to be removed will depend on your bargaining power in the situation. If you are borrowing money from a bank or a private lender then you most likely will not be able to have the requirement removed. If you are negotiating with a supplier then, depending on the size of the supplier and the size of your account with them, you may be able to have the requirement removed or a limit put on the amount that you are guaranteeing. Regardless of your bargaining power, there is no harm in asking for the requirement to be removed or limited.
On the other side of the coin, if you are the company providing credit we advise that you do not waive the requirement. You need to protect your ability to be repaid. If you are the supplier of goods on credit then we would provide further advice to you to protect your interest under the PPSA.
Never sign a personal guarantee and indemnity without legal advice. The company providing credit may have represented that it means or says one thing, but it might actually have a completely different result. It will also be in place until it is specifically released.
For more information contact our Commercial Business Team.