It is common in business supply, sale and licensing contracts to find provisions for the company director to personally guarantee the company’s obligations under the contract. This is not necessarily as obvious to find as you might think and occasionally these provisions are secreted away in the fine print.
These personal guarantees are important, as innocuous as they may seem when you sign the contract. Indeed, in debt recovery proceedings a company director is generally pursued for the debts of the company, particularly in circumstances where the company is struggling financially. Often company directors simply do not realise that they had in fact provided a personal guarantee of the company’s obligations when they executed the contract in question.
What to look out for:
Personal guarantee provisions can form part of the general terms and conditions of the contract. Keep an eye out for any clause or provision which provides that the company director is signing the contract in both their capacity as company director and in their personal capacity. Where there is such a provision and the director has executed the contract, the director may well be binding themselves to personally guarantee the company’s obligations.
If a company director has executed such a contract and genuinely was unaware of the personal guarantee provision, it may be possible to demonstrate this to a court and to escape liability for their obligations as guarantor. However, this can be very difficult to establish for many company directors. It is often challenging to determine what the company director’s actual level of knowledge was at the specific time in question. The court may also assume that the company director has a relatively high degree of commercial experience and expertise as a result of their position. Further, under Australian law, if you sign a contract you are deemed to have read it.
Whenever you are signing a document of a potentially contractual nature in your role as director of a company, ensure that you know what it is your signature is indicating agreement to. It is worthwhile to always obtain legal advice prior to signing any document and/or contract so that you know exactly what your obligations are.
For more information contact Rockliff Snelgrove Lawyers on (02) 9299 4912.