Personal Guarantees in Standard Credit Applications

Personal Guarantees

Companies engaging in trade or commerce frequently apply for credit. A supplier providing credit facilities for these companies (short term) will seek to secure payment of the credit provided. This is normally done through written agreements that set out terms and conditions of trade, and provide for a personal guarantee from a company director or other third party.

What happens if the company director or third party does not sign the personal guarantee section?

In a recent case the credit application consisted of 3 distinct sections –

  1. The "Terms and Conditions";
  2. The “Agreement” and;
  3. The “Guarantee and Indemnity” (“the Guarantee”).

The company’s managing director completed and signed the “Terms and Conditions” and the “Agreement” but he did not sign the Guarantee. The company was placed into liquidation and the supplier claimed the amount owed to the supplier from the director personally.

The director argued that he was not personally liable on the Guarantee as he had not signed it. Further, the execution clause included the words “SIGNED and sealed by/on behalf of the Customer”. Those words indicated a qualification to his signature, which was fortified when he inserted his position “Managing Director”. This, he argued, indicated a lack of intention to be personally bound.

In considering the director’s personal liability, the Court held that when a party signs a document that embodies all the terms of a contract, the signing party is taken to have agreed to those terms. The failure to sign the Guarantee did not assist the director as the “Terms and Conditions” included a clause to the effect that the person signing the “Terms and Conditions” accepted liability as principal debtor “jointly and severally with the incorporated body and in our own names”. By signing the “Terms and Conditions”, the director objectively expressed to the world that he accepted the obligation to pay on behalf of the company, and in his own name.

The decision

The Court rejected an argument by the director that the Terms and Conditions were unjust and that he ought to be entitled to relief under the Contracts Review Act 1980 (NSW). The Court held that the Terms and Conditions were standard terms in a commonplace transaction, with which the director was familiar. There was no evidence of behaviour that the supplier was attempting to take advantage of the director.

The decision highlights the importance of carefully reading, and obtaining advice on the consequences, for anyone completing a credit application on behalf of a company. Sometimes the devil is in the detail. If you have any questions about signing credit applications on behalf of a company call us on 9440 1202.