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Directors Guarantees: The Devil is in the Detail

It is common for suppliers of goods to seek personal guarantees from company directors.  This normally occurs as part of the credit application and approval process.

The purpose of a guarantee is to provide the supplier with additional security in the event that the debtor becomes insolvent and is unable to settle their account.

A guarantee imposes separate contractual obligations on the guarantor (usually a company director) and as such subject to the normal terms of a contract.  The effect of a guarantee is to place the guarantor in a similar position to the principal debtor.

Interestingly, the guarantor is expected to find out if the debt is being paid and there is no obligation for the creditor to notify the guarantor if the debtor is in arrears.

In addition, a guarantee cannot be avoided simply because the guarantor did not consider the implications of the guarantee, or signed the guarantee on the say so of  a spouse.  Similarly, a guarantee cannot be avoided because it was never explained to the guarantor to think before signing the guarantee. 

Despite this frightening aspect, it is not uncommon for director’s guarantees to be set aside due to simple carelessness.  Attention to detail and some basic understanding of the principal of contracts may prevent this from happening.

Communication

It is common practice for suppliers to send credit applications accompanied with a standard guarantee to prospective customers, thinking that an offer has been made by the supplier and return of the required forms are considered to be acceptance.

Sending forms to prospective customer is actually an invitation to conduct business on specific terms.  The offer comes from the customer and only occurs once they complete and return the forms to the supplier.  Once the offer has been accepted, the supplier should acknowledge that acceptance, ideally buy returning a duly executed copy of the forms.

Undue Influence

This is when a supplier, in a position of strength, forces a guarantor to sign when they may not have the mental capacity to reject the guarantee.

Unconscionable Conduct

This may occur where the guarantor has a disability such as illiteracy, or old age, or emotional vulnerability.  If the guarantor knowingly takes advantage, without receiving professional legal advice, the guarantee may not be enforced.

Implications

It is generally a good idea to obtain legal advice when drafting or signing a guarantee.  Many credit providers will insist that guarantors get professional legal advice.  Ensure that all communications is in writing, particularly if the terms of the arrangement is varied in any way, such as payment terms or credit limits imposed and that the consequences for breaches are also clearly understood.  It is also advisable to suggest all forms are witnessed by an professional third party, preferably a solicitor or an accountant.

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Paul Baggetta is the Founder & Principal of Baggetta & Co. Paul Baggetta has been a Taxation Accountant since 1981, a Financial Planner since 1998, and in 1993 qualified as a Real Estate Licensee, holding a Triennial Certificate (currently not trading) and operated his own Real Estate business for property investment clients for over 5 years as a second business.

Financial planning services are provided by Paul Baggetta as an Authorised Representative (No. 261469) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. Australian Financial Services License No. 223135.

 

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