Personal Guarantees
In New Zealand's commercial landscape, personal guarantees are a crucial tool for securing transactions. Over recent months, there has been a noticeable increase in disputes surrounding personal guarantees, especially regarding their enforceability and validity.
A personal guarantee is a legal commitment where an individual (the guarantor) agrees to fulfil the obligations of a debtor (often a company) if that debtor defaults on a loan or other contractual obligation. This assurance provides an extra layer of security for creditors, making it easier for businesses to obtain financing or secure business contracts. If you are a director, you need to have a clear understanding of what your obligations are when signing a personal guarantee.
Companies frequently include personal guarantee clauses in contracts to mitigate financial risk. By requiring a personal guarantee, creditors ensure that the obligations will still be met, even if the company faces insolvency or struggles financially.
Many disputes arise over whether a personal guarantee is enforceable. These disagreements can stem from a guarantor claiming they were unaware they were signing a guarantee or challenging the legitimacy of the guarantee due to unclear terms.
A personal guarantee can be considered valid and enforceable if it takes the form of a Deed under the Property Law Act or as a contractual agreement. Different legal principles will apply to these options in relation to the following aspects:
Is it documented in writing?
Are the terms clearly defined?
Does it include consideration?
The amount being guaranteed.
Personal guarantees are powerful tools in commercial transactions, offering creditors more peace of mind. However, the enforceability of these guarantees relies on careful drafting, full transparency, and an understanding of legal obligations. Businesses and individuals should ensure that guarantees are properly documented and seek legal advice to avoid future disputes.
Our litigation solicitor, Luis De Mattos, is available to help if you are:
A creditor in drafting a Personal Guarantee wanting to ensure the personal guarantee is valid and enforceable; and or
A Director of a company:
a. Before signing a personal guarantee, to understand your obligations; or
b. After signing a personal guarantee and querying its enforceability.
Contact him at luis.demattos@turnerhopkins.co.nz to understand your options and protect your interests.
