Most directors don’t think much about the personal guarantee they signed when opening a trade account or taking on a business loan. It’s a standard clause, the business is trading well, and the risk feels abstract.

It stops feeling abstract the moment the business runs into difficulty and a creditor writes to the director personally, demanding payment. At that point, what seemed like a routine formality can become one of the most significant financial events in a person’s life.

This article explains what personal guarantees are, when and how they are enforced, what other forms of personal director liability can arise, and critically what options are available when the pressure becomes real.

What is a Personal Guarantee?

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A personal guarantee is a legal commitment by an individual, usually a company director to repay a debt personally if the company cannot. By signing one, a director steps out from behind the protection of limited liability and agrees to stand behind the company’s obligations with their own assets.

They are extremely common. Lenders, suppliers and landlords routinely require personal guarantees as a condition of doing business, and they are often presented as a standard part of a credit application or finance agreement. Signed quickly, without the significance being fully explained.

Important: A personal guarantee does not expire when the company closes. If the company is wound up and a debt remains unpaid, the creditor can still pursue the guarantor personally sometimes years after the company has ceased to exist.

Obligations that are commonly backed by personal guarantees include:

• Trade supplier accounts — credit extended by suppliers on standard terms
• Equipment and asset finance — leases and hire purchase arrangements
• Business loans and bank overdrafts
• Commercial lease obligations — often one of the largest exposures
• Credit facilities — business credit cards and working capital facilities

When Does a Personal Guarantee Get Called?

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Creditors do not typically pursue a personal guarantee while the company is trading and meeting its obligations. The guarantee sits in the background, unexercised.

The trigger is almost always company financial difficulty. When a company enters voluntary administration, is placed into liquidation, or simply stops paying its debts, creditors holding personal guarantees will begin enforcement action against the director directly.

Where multiple creditors hold guarantees, the cumulative personal liability can quickly exceed what a director can realistically pay. The transition from “the company has a problem” to “I have a problem” can happen very quickly.

ATO Liabilities and Director Penalty Notices

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Personal guarantees are not the only way a director can become personally liable for company debts. Under the Director Penalty Notice (DPN) regime, the Australian Taxation Office can recover certain unpaid company tax liabilities directly from the director personally, regardless of whether a guarantee was ever signed.

Directors can be made personally liable for:

• Unpaid PAYG withholding (tax withheld from employee wages)
• Superannuation Guarantee Charge (SGC) – compulsory employer super contributions
• GST – goods and services tax liabilities

DPN liability can arise quickly and, in some cases, cannot be avoided even by placing the company into administration or liquidation. The ATO has also significantly increased its enforcement activity post COVID. 

This is a significant and evolving area of risk for directors. Understanding a Director Penalty Notice the rules, timeframes and options is critical for all directors.

What Are Your Options When a Guarantee is Called?

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Receiving a demand under a personal guarantee can feel overwhelming. But options do exist, and the earlier you speak to someone, the more of them remain available.

Option	What it involves
Negotiate directly with creditors	In some cases, creditors may accept a reduced payment or a structured repayment arrangement rather than pursuing formal legal action. Early, good-faith engagement is more likely to produce a favourable result than waiting.
Part IX — Debt Agreement	A formal arrangement under the Bankruptcy Act 1966, available to individuals meeting income and asset thresholds. Allows you to make an affordable repayment offer to creditors as an alternative to bankruptcy. Administered through the Australian Financial Security Authority (AFSA).
Part X — Personal Insolvency Agreement	A more flexible formal arrangement, available regardless of income or asset levels. An insolvency practitioner is appointed to negotiate a binding agreement with creditors. Can result in a partial debt compromise while avoiding bankruptcy.
Voluntary Bankruptcy	A formal legal process under the Bankruptcy Act 1966 which provides relief from most unsecured debts. In some circumstances it is the most practical path to a financial fresh start.

Each option has different eligibility requirements, costs, implications and timeframes. Choosing the wrong one or acting without understanding the full picture can make the situation worse. Australian Financial Security Authority (AFSA) and our Team can provide more information on personal insolvency options, and independent expert advice like that from one of our insolvency experts is strongly recommended before taking any steps.

How Rodgers Reidy Can Help

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At Rodgers Reidy, we regularly work with directors and individuals who have been placed in difficult financial positions as a result of personal guarantees. Our team understands both the legal frameworks and the human reality of these situations.

We can assist with:

• A clear, confidential assessment of your overall financial position and personal exposure
• Explain all available options. Informal, formal, and everything in between
• Advising on the implications of voluntary bankruptcy, Part IX debt agreements, and Part X personal insolvency agreements
• Director Penalty Notice advice and ATO engagement
• Where applicable, exploring company-level restructuring options that may reduce or remove the personal liability entirely
• Guidance on the most practical and commercially sound path forward for your specific circumstances
  

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Speak with a Rodgers Reidy adviser today

The earlier you have this conversation, the more options remain available. Our advisers across all Australian offices provide confidential, no-obligation initial discussions for directors navigating personal guarantees and financial distress. 

Find your nearest Rodgers Reidy office →

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Related reading:  Director Penalty Notices: Navigating Personal Liability   |   DPN 21-Day Action Guide   |    Bankruptcy or Liquidation?   |   Insolvency & Restructuring Glossary