Personal guarantees: should you ask your customers for one?

A personal guarantee is a director agreeing, as an individual, to stand behind their company’s account with you. If the company does not pay, or goes into liquidation, you can still pursue the debt through the director personally. In New Zealand it must be in writing and signed by the director giving it.

What is a personal guarantee?

When you give a company credit, your agreement is with the company. The company is a separate legal entity from the people who run it, so if it closes its doors, that is usually where your options end. A personal guarantee adds another layer of protection. A director of the company agrees, as an individual, to be personally financially responsible for the company’s account with you.

You will also see it called a director’s guarantee, or a deed of guarantee and indemnity, which is the name most guarantee documents use now. It is a fancy way of saying personal guarantee.

What a personal guarantee gives you

It gives you a pathway to the director’s personal assets to recover what you are owed. That matters most on the day the company stops trading. When a business goes into receivership, voluntary administration or liquidation, that process freezes what you can do against the company, and you wait with every other creditor. A guarantee is a separate promise from a different person. The liquidation carries on over there, and you can carry on recovering what you are owed from the guarantor over here.

Official guidance from the Insolvency and Trustee Service says the same thing plainly: directors often guarantee their company’s debts, which means they have to repay them if the company goes into liquidation.

There is a second reason we put so much weight on it. A director whose company has been liquidated can start again under a new name. Once a business closes and the company is removed, there is nothing more anyone can do about a debt it owed, because the company no longer exists. A personal guarantee holds the director personally responsible, whatever happens to the company.

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Does a personal guarantee hold up in New Zealand?

It can, when it is done properly. The Property Law Act 2007 (section 27) says a guarantee must be in writing and signed by the guarantor. The courts have added two points that matter in practice.

• It has to contain the director’s own promise. The Supreme Court has said a signature under the word “guarantor” is not enough on its own. The signed document has to say that the person agrees to pay the debt if the company does not.
• Signing for the company is signing for the company. When a director signs your credit application or your terms of trade on behalf of their company, the starting presumption is that they signed only for the company, and not personally as well.

That is why we keep the personal guarantee as its own document, separate from the terms of trade, signed by the director as themselves. A guarantee buried in the terms is too easy to miss. Most guarantees are signed as a deed, and under the same Act an individual signs a deed with their signature witnessed by someone who is not a party to it (section 9). Your terms of trade and credit application do not usually need a witness; the guarantee may.

Unlike a general security agreement, a personal guarantee is not registered on the PPSR. You hold it on file, along with the credit application and the signed terms, so you can find it the day you need it.

And always go back to the Companies Register for the correct entity. The guarantee backs a particular company, so the company named in your documents has to be exactly the one you are dealing with.

How it fits with your terms of trade and a credit application

Each document does a different job, and they work best together.

• Your terms of trade are your day-to-day operating agreement: how and when you are paid, and what happens if you are not.
• The credit application tells you exactly who you are dealing with: the legal entity, its directors, and who has the authority to commit the business.
• The personal guarantee gives you access to the director’s personal assets if the company has issues.
• A general security agreement, registered on the PPSR, gives you security over the company’s own assets.

Your terms can secure the goods you supply. Anything beyond that usually needs an additional document, and the guarantee is the one that reaches past the company altogether. More on what the terms themselves need in terms of trade in New Zealand.

See how we can help with your terms of trade

If asking for one feels awkward

A lot of businesses are uncomfortable presenting personal guarantees, and they shouldn’t be. When you supply on account, it is your funds that are on the line if they don’t pay you, your funds and your reputation with your own suppliers.

Think back to when you opened your own trade accounts. Chances are you signed a personal guarantee, because a trade account is essentially a loan: your supplier funds your ability to take the goods now and pay later. Go to a bank for lending and you would for sure have to sign one. When you do the work first and invoice afterwards, you are giving your customer the same thing. You are acting as a credit provider.

Some directors will say they don’t sign personal guarantees. Their company is separate, there are multiple directors, they keep personal and business separate. That is their right. But there is another side of the fence. If you are expected to carry all the risk, funding the labour, the materials and the delivery up front, it is fair to ask whether the director of your customer’s company is prepared to back their business too.

Timing is the part that catches people. A customer who has stopped talking to you is not going to sign anything. If you wait for something to go sideways before you secure yourself, the horse may already have bolted.

And the paperwork has to be right. One business we know had a customer they had done plenty of work for before, with a debt over $30,000. They had the customer’s vehicle on site, a signed credit account application, and a personal guarantee from the director. Then it turned out they had most of the company name correct, but not all of it. If the paperwork is wrong, it can weaken the protection you thought you had.

When to ask for a personal guarantee

You do not need one from every customer, and you get to decide where your line is. Case by case, these are the moments it earns its place:

• A bigger or riskier job, where you are carrying more labour and materials before you are paid.
• A new or unknown company, or one that has not been in business long and has no credit history yet.
• A customer with a history of not paying, or one negotiating with you to keep working on account.
• A change in the customer’s business, such as new owners or new directors.

The best time to get it signed is at the beginning: when the account is opened, or before a large project starts, while the relationship is good and fresh. Present it as part of how you work with every customer at that level, and it reads as standard practice.

If a director won’t sign, that doesn’t mean you do nothing. You shift how you manage the risk: as much prepayment as possible, a lower credit limit, PPSR security, or changing the way you work with them. Different tools, same outcome. We go through that conversation, and how to set your own line, in checking a customer before you give credit.

Already owed money by a company that has gone into liquidation? Find out first whether anyone signed a personal guarantee. We cover what to do next on when your customer goes into liquidation.

No document guarantees you get paid. A personal guarantee puts you in a far stronger position if it comes to it. This page is education and commercial insight from our own research and experience, not legal advice. Do your own research, and get legal advice for your own situation.