Guarantees

Personal guarantee

Giving a personal guarantee is sometimes referred to as “giving security”.

A personal guarantee is a promise, in law, to answer for the debt or default of another person or entity, who it is contemplated may become liable to the person to whom the guarantee is given (i.e. the creditor).

Personal guarantees are used to secure the performance of obligations, where the contracting party may not have sufficient assets to provide adequate security.

For example: a company might already have multiple debtors or have a thin balance sheet, however the directors might each have multiple properties to use as security. The creditor says they require personal guarantees from the directors before providing credit to the company.

Generally, the person who acts as guarantor will be entitled to be reimbursed by the debtor for payment of the debt to the creditor.

Director’s guarantee

Many commercial contracts include clauses containing “directors' guarantees” which become operative just by the director signing the contact on behalf of the company - often in the 'small print'.

This means, the director’s personally guarantee the company’s performance of its obligations under the contract, by giving security.