When you’re running a small business, it’s normal to be asked to “back the company” personally - especially when you’re applying for credit, entering a commercial lease, or signing up with a key supplier.
Often, the document you’re asked to sign is a director’s guarantee (sometimes called a director guarantee, or directors guarantees). It can look like a quick formality, but it can have serious consequences for your personal assets if things go wrong.
If you’re a director (or about to become one), understanding how a director’s guarantee works can help you avoid signing something that exposes you to risk you didn’t expect - or at least help you negotiate it so the risk is more manageable.
Below, we’ll walk you through what a director’s guarantee is, where it commonly shows up, the main risks, and what to look for before you sign.
What Is A Director’s Guarantee (And Why Is It So Common)?
A director’s guarantee is a personal promise you make (as a director) to pay or perform the company’s obligations if the company doesn’t.
In plain English: if your company can’t pay its bill (or breaches the contract), the other party can try to recover the debt or loss from you personally.
This is common because a company is a separate legal entity. Many small businesses trade through a company because it can help limit personal liability in many situations.
But from the other party’s perspective (for example, a landlord or supplier), contracting with a small company can feel risky. If the company has limited assets, the other party may want additional comfort that they’ll still get paid. That’s where a director’s guarantee comes in.
Where You’ll Usually See Directors Guarantees
Directors guarantees commonly appear in:
- Commercial leases (especially for retail or office premises)
- Supplier terms and credit applications (trade accounts and ongoing supply)
- Equipment finance or business loans
- Service contracts where the customer is relying on your company’s performance
- General security arrangements where a lender/supplier wants a broader set of protections (for example, a General Security Agreement)
It’s also common for a director’s guarantee to be bundled into a longer “standard form” agreement. Sometimes it’s a separate guarantee page at the back. Other times it’s included as a clause and you won’t notice it unless you’re looking for it.
How A Director’s Guarantee Can Put Your Personal Assets At Risk
It’s easy to assume that because your business operates through a company, your personal property (like your home or savings) can’t be touched if the business fails.
A director’s guarantee can change that.
If you sign a director’s guarantee and the company defaults, you might be personally liable for:
- Outstanding debts (for example, unpaid invoices or rent)
- Interest that accrues on overdue payments
- Enforcement costs (including legal costs, debt collection costs, and sometimes “full indemnity” legal costs)
- Damages for breach (for example, loss suffered because the company didn’t perform)
- Other obligations the contract pushes onto the guarantor (which can be broader than you’d expect)
“Joint And Several Liability” (A Big One To Watch)
Many director’s guarantees say the guarantors are jointly and severally liable.
This matters if there’s more than one guarantor (for example, two directors sign). “Joint and several” usually means the creditor can pursue any one guarantor for all of the debt.
In other words, you could end up paying 100% of the amount, even if you “only own half the business” or you feel the other director should contribute. You may have separate rights to recover from the other guarantor later, but that can be time-consuming and uncertain.
Director’s Guarantees Can Keep Applying Even After You Leave
Another common surprise is that a director’s guarantee may still apply even if:
- you resign as director
- you sell your shares
- someone else takes over day-to-day control
Some guarantees only end when the creditor formally releases you (in writing). Others last until the contract ends and all obligations are fully paid and satisfied. If you’re planning an exit (or bringing in new investors), this is a key risk to manage early.
What To Check Before You Sign A Director’s Guarantee
Director’s guarantees are not all the same. Some are relatively contained. Others are extremely broad.
Before you sign, here are practical things to check (and ask questions about).
1. What Exactly Are You Guaranteeing?
Look for the clause that defines the “Guaranteed Obligations”.
Are you guaranteeing:
- only payment of invoices?
- all obligations under the contract (including non-payment obligations)?
- damages, penalties, interest, and enforcement costs?
- future variations or renewals?
A guarantee that covers “all money owing now or in the future” is much broader than a guarantee limited to a specific purchase or a capped amount.
2. Is There A Cap On Your Liability?
Some director’s guarantees can be negotiated so your liability is capped (for example, capped at $50,000, or capped to a set number of months’ rent).
If the guarantee is uncapped, you’re potentially exposed to the full loss amount - which could increase over time (especially if interest and legal costs apply).
3. Can The Contract Be Varied Without Your Consent?
Many guarantees say the creditor can:
- vary the underlying contract
- extend payment timeframes
- give the company more credit
…without needing to tell you, and without affecting the guarantee.
This means you could sign a guarantee thinking the risk is limited, only for the company’s exposure to increase later. It’s worth checking whether there’s any requirement for guarantor consent to changes that increase the liability.
4. Are You Giving A Separate Indemnity As Well?
Some documents aren’t just guarantees - they’re a “guarantee and indemnity”.
An indemnity can create a separate obligation for you to cover loss. Depending on the wording, it may also give the creditor additional rights (or a different pathway) to recover amounts from you compared with a standalone guarantee.
If the document includes both, it’s important you understand how broad the indemnity is, and when it’s triggered. This commonly comes up in documents like a Deed of Guarantee and Indemnity.
5. What Are The Enforcement And Legal Costs Clauses?
Many director’s guarantees include an obligation to pay the creditor’s legal costs on a full indemnity basis (not just “party-party” costs). That can significantly increase your exposure if there’s a dispute.
It’s also worth checking:
- whether a demand can be made immediately on default
- how quickly you must pay after demand
- whether the creditor can pursue you without first pursuing the company
Some agreements require:
- all directors to sign as guarantors
- a related entity (like a holding company) to give security
- you to give personal guarantees even if you are a minority shareholder
This is where internal business arrangements become critical. If there are multiple owners, a properly set up Shareholders Agreement can help clarify how decisions like giving guarantees are approved, and what happens if one director ends up paying out a guarantee.
Can You Negotiate A Director’s Guarantee (Or Avoid Signing One)?
Yes - sometimes.
In many small business situations, the other party will start with their standard terms. That doesn’t always mean those terms are non-negotiable. What you can negotiate depends on your bargaining power, the level of risk, and how much the other party wants the deal to go ahead.
Negotiation Options That Can Reduce Your Risk
Here are common ways to reduce exposure:
- Cap the guarantee to a specific dollar amount or time period
- Limit the guarantee to specific obligations (for example, payment obligations only)
- Exclude certain losses (for example, consequential loss, or broad categories of damages)
- Require notice before liability increases (for example, if credit limits are raised)
- Time-limit the guarantee or have it fall away after a period of compliant trading
- Replace the guarantee with another form of security (for example, a bank guarantee or higher upfront deposit, depending on the deal)
Even a small change can make a major difference if things go wrong later.
If You Can’t Avoid It, Make Sure The Rest Of The Deal Is Tight
Sometimes, the reality is that you need the contract (the premises, the supplier relationship, the finance) and the other party won’t proceed without a director’s guarantee.
If you’re in that situation, the next best step is to make sure the underlying contract is commercially fair and legally clear. For example, if you’re entering a lease or a long-term supply arrangement, you want to be confident about:
- what constitutes a breach or default
- how termination works
- how fees can increase
- what happens at renewal
Because if the underlying agreement is ambiguous or one-sided, the director’s guarantee effectively magnifies that risk onto you personally.
What Happens If The Company Defaults After You’ve Signed?
If the company defaults, the creditor will usually follow a process like:
- Issue a notice or demand to the company (and often the guarantor) for payment or to remedy the breach
- Take enforcement action if the default isn’t remedied (this could include starting legal proceedings)
- Pursue the guarantor for payment (sometimes at the same time as pursuing the company)
At that point, what matters most is exactly what you signed - including any indemnities, costs clauses, and whether the creditor can pursue you immediately.
Does A Director’s Guarantee Override “Limited Liability”?
Not automatically in every situation, but it can significantly reduce the practical protection you usually get from trading through a company for that particular deal.
Operating through a company is still valuable, and it can protect you in many situations. But if you personally sign a director’s guarantee, you’re agreeing to be personally responsible for the guaranteed obligations if the company doesn’t meet them.
This is why it’s important to treat a director’s guarantee as a high-risk decision - not a box-ticking exercise.
Does This Connect To Other Director Obligations?
It can. Directors already have legal duties and responsibilities, and there are separate rules around things like insolvent trading and proper financial management.
A director’s guarantee is different - it’s a contractual promise - but it often shows up in the same situations where cashflow is tight and business risk is high.
If you’re unsure whether your business structure is still right for what you’re doing (especially as you grow), it may be worth reviewing your overall setup, including whether you have a suitable Company Constitution in place and clear internal approvals for major commitments.
Key Takeaways
- A director’s guarantee is a personal promise that you’ll cover the company’s obligations if the company can’t, and it’s common in leases, supplier credit terms, and finance documents.
- Signing a director’s guarantee can expose your personal assets to business debts, interest, and enforcement costs, even if you trade through a company.
- Before signing, check exactly what obligations are covered, whether liability is capped, whether the contract can be varied without your consent, and whether the document includes an indemnity.
- In many cases you can negotiate directors guarantees, such as by limiting scope, capping liability, or requiring notice of increased exposure.
- If you can’t avoid a director’s guarantee, it becomes even more important that the underlying agreement is clear and balanced - because any risk in the contract can become personal risk.
Note: This article is general information only and isn’t legal advice. If you’d like advice on your specific situation, it’s best to speak with a lawyer.
If you’d like a consultation on a director’s guarantee (including reviewing the guarantee and negotiating changes), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
