Personal guarantees are crucial

The new year is a time that is ripe with deals and the signing of new reseller and distributor agreements.

However, entering into a contract for payment with a company may not always be enough to secure a debt owing by that company.

It is often necessary to bind the directors in their personal capacity as an additional precautionary measure.
A personal guarantee can be used in this regard to guarantee the debts of a reseller company. The importance and far-reaching consequences of a personal guarantee for all parties should not be underestimated.

Generally, the person to whom goods are delivered is primarily liable for payment for those goods.

However, there is a risk involved in entering into a contract whereby a reseller company is provided with credit, for example, taking an amount of stock from a supplier, such as printers or other peripherals with the usual 30 days to pay.

If the reseller sells the printers and subsequently goes into liquidation with no assets to distribute to creditors, the supplier will be faced with a real problem – namely, that there is no recourse to claim the outstanding monies due and owing from the defunct company.

A company is a separate legal entity to the directors of the company. One benefit of operating a business under the umbrella of a company is to rely on the limitation of liability provisions that apply to companies.
That is, a company that is sued will generally only be able to be sued up to the value of the company, except in certain exceptional circumstances.

A properly drafted and executed personal guarantee will operate as an additional layer of security to join the directors of the reseller company to a debt of the company in their personal capacity.

Thereafter, if the debt of the company is unpaid, the supplier can direct a legal claim to the directors of the company and may be able to go after the directors’ personal assets, such as property, shares and cash.
This way, the supplier is able to circumvent what is often described as the reseller’s ‘corporate veil’.

Of course, a personal guarantee is not an absolute solution to the corporate veil. Directors may also be without sufficient personal assets necessary to satisfy the debt. However, a personal guarantee is a level of security that may certainly be adequate in particular circumstances.

When entering into a personal guarantee it is crucial that it comprehensively sets out the correct requirements of the parties and is drafted by a legal practitioner.

In the case of Nilesh Mehta v. J Pereira Fernandes SA, the English High Court analysed whether or not an email satisfied the relevant legal requirements for the provision of a personal guarantee.

It is important to remember that if a personal guarantee is entered into in circumstances that constitute duress, misrepresentation or other unconscionable circumstances, the guarantee could be set aside.

One way that these issues can generally be overcome is by advising the guarantor to seek independent legal advice.

On the flipside, resellers that are asked to sign personal guarantees need to be aware of just how important a legal document the guarantee is.

It is therefore critical that resellers and suppliers obtain legal advice based on their individual circumstances.

Disclaimer: This column is for general informational purposes only. It is not legal advice nor is it a substitute for legal advice. Readers should seek legal advice on their own particular circumstances.

Alan Arnott is a technology and telecom-munications lawyer with qualifications in computer science and law with Arnotts Lawyers in Sydney. For more information, please visit: www.technologylaw.com.au or www.arnotts.net.au.

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