You resigned as a director of the family company eighteen months ago and thought you were done with it. Then a letter arrives from the bank. The company defaulted on the loan you helped it secure, and the bank is calling on the guarantee you signed at the kitchen table when the money was advanced. The amount demanded is $480,000, plus interest, and the letter gives you fourteen days to respond. You are not sure you even kept a copy of the document you signed.
This is one of the most common phone calls Australian directors make, and the surprise in it is almost always the same: they believed that resigning, or the company going broke, ended their obligations. It does not. A director's guarantee is a personal contract between you and the creditor, quite separate from the company's contract. Understanding what you actually signed, and what your real options are, is the difference between negotiating your way out and losing your house.
Why the guarantee outlives the company
A director's guarantee is the price a lender, landlord or trade supplier extracts before dealing with a company. Companies are separate legal entities, which means a creditor cannot normally reach the directors' personal assets if the company does not pay. The guarantee closes that gap: you promise personally to pay the company's obligations if it defaults. It commonly backs business loans, commercial leases, equipment finance and trade credit accounts.
Because the guarantee is a separate contract between you and the creditor, the fate of the company does not decide its fate. If the company is wound up and deregistered, the creditor can still sue you under the guarantee. If you resign, resigning does not automatically end a continuing guarantee. Many guarantees are drafted to cover all money the company owes from time to time, and a director can remain liable for debts that fall due years after they left the board. Whether yours works that way depends entirely on the terms you signed, which is why the first step below is the one that matters most.
What determines your exposure is the document itself:
- Scope: whether the guarantee covers one specific loan or facility, or all present and future obligations of the company (an "all moneys" clause).
- Duration: whether it has an end date, applies only until a facility is repaid, or is expressed to continue indefinitely.
- Limit: whether your liability is capped at a dollar amount or is unlimited.
- Who signed: whether other directors also guaranteed the debt and on what basis, because that affects who the creditor can pursue and what you can recover from them.
Five moves to make when the demand arrives
If a creditor has demanded payment under your guarantee, the order in which you act matters. The steps below go from the cheapest and most urgent to the most involved. Steps three and four are genuinely parallel: you can pursue negotiation and a challenge to enforceability at the same time, and you often should.
Read the guarantee and its terms before you respond
Find the guarantee, whether that means digging through old files, asking the creditor for a copy, or requesting it from the company's records. You need to know what you are actually liable for before you say anything to the creditor. Check:
- What it covers: does it secure one facility or all the company's debts? A guarantee for a specific loan does not necessarily cover a later overdraft.
- Whether it is continuing: a continuing guarantee can keep you on the hook for obligations incurred after you resigned.
- Whether a written demand is required: many guarantees say the creditor can only enforce after serving a written demand in a particular form and waiting a set period. If no valid demand was made, the creditor may have jumped the gun.
- When you signed it: a creditor generally has a limited time, commonly six years in most states, from when the debt falls due to sue on a guarantee. An old debt can be statute-barred.
- Whether it is joint and several: if you guaranteed the debt with other directors on a joint and several basis, the creditor can pursue any one of you for the whole amount, regardless of who benefited from the loan.
Put your response in writing
Do not ignore the letter and do not rely on a phone call. Respond in writing within the period the demand allows, and say clearly whether you accept or dispute the debt and why. If you dispute that a valid demand was made, or that the guarantee covers this debt, say so in writing and keep a copy. If you accept the debt, say that too, but do not volunteer more than you need to. Everything you write now can be produced in court later, so keep it factual and unemotional. If you are represented, have the lawyer write it.
Negotiate a release, a substitution or a payment plan
There is no statutory right to walk away from a guarantee. A guarantee is a contract, and ending it early requires the creditor's consent. That consent is more likely than you might expect if the company is still trading and paying, because a creditor would rather keep a performing customer than fight a guarantor. The realistic levers are:
- Release: ask the creditor to release you from the guarantee, ideally in exchange for something, such as the company securing a replacement facility or a lump sum reduction.
- Substitution: if you are resigning, propose transferring your guarantee to the incoming director. This is a novation: all three parties, you, the creditor and the new director, must agree, and the new director will need to sign.
- Payment arrangements: if the debt is real and you cannot pay it in full, a negotiated repayment plan with the creditor is usually far better than a judgment. Most creditors prefer a workable arrangement to the cost and delay of enforcement.
- Contribution from co-guarantors: if you guaranteed the debt jointly and severally with others and you end up paying more than your share, you can seek contribution from the other guarantors. Knowing who else is on the hook shapes your negotiating position.
Any release, substitution or variation should be recorded in a written deed or agreement. A handshake or an email from a lending manager will not reliably bind the creditor later.
Test whether the guarantee can be set aside
A guarantee obtained by misconduct is not automatically void, but it can be voidable, meaning a court can set it aside. The recognised grounds include misrepresentation about what you were signing, duress, undue influence, and unconscionable conduct. The High Court has set aside guarantees obtained through unconscionable conduct in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, where elderly guarantors with limited English signed a guarantee the bank knew they did not understand, and guarantees obtained through undue influence in Garcia v National Australia Bank Ltd (1998) 194 CLR 395, where a wife guaranteed her husband's business debts without understanding the extent of the exposure. Unconscionable conduct in trade or commerce is also prohibited by s 20 of the Australian Consumer Law, which is Schedule 2 of the Competition and Consumer Act 2010 (Cth), with a mirror provision in the ASIC Act for financial services.
Two further points are worth knowing even where there was no misconduct at signing:
- Banking Code of Practice: if the guarantee is to a bank, the Banking Code of Practice, which took effect on 28 February 2025 and binds the major banks, imposes specific duties on the bank before it takes a guarantee. These include giving the guarantor a Guarantor Disclosure document and information about the guarantee and its effect. A bank's failure to follow those obligations can be raised in a dispute, and breaches can be complained about to the Australian Financial Complaints Authority.
- Variation of the underlying contract: if the creditor and the company vary the loan or lease that you guaranteed, in a way the guarantee did not contemplate and without your consent, you may be discharged from liability. This is the principle from Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549: a creditor cannot change the deal you guaranteed and still hold you to it.
These are technical arguments that turn on the facts and the documents. They are the reason a lawyer should look at the file before you commit to paying anything.
Know what enforcement actually looks like
If you cannot negotiate and the guarantee is enforceable, the creditor's path runs through the courts. It sues you, obtains a judgment for the debt, and then uses the judgment to collect. The common enforcement options are a garnishee order that redirects part of your wages or money in your bank account to the creditor, and a writ for the seizure and sale of your property, which can extend to your home.
For larger debts the creditor may also make you bankrupt. Under s 41 of the Bankruptcy Act 1966 (Cth), a creditor who holds a final judgment for a debt above the statutory minimum can have the Official Receiver issue a bankruptcy notice. You then have a short period to pay or reach an arrangement. Failing to comply is an act of bankruptcy under s 40 of the Bankruptcy Act 1966, which allows the creditor to present a creditor's petition and seek a sequestration order. The consequences of bankruptcy are significant:
- Control of assets: your assets vest in a trustee, who sells them to pay creditors.
- Restrictions: an undischarged bankrupt cannot manage a corporation without the court's leave, which for many directors is the end of their working life, under s 206B of the Corporations Act 2001 (Cth).
- Reputation and credit: bankruptcy is public, stays on credit records for years, and is disclosed on most credit applications.
- Discharge: most bankrupts are automatically discharged after three years from filing their statement of affairs under s 149 of the Bankruptcy Act 1966, but discharge does not remove the practical damage.
The point is not to frighten you. It is that enforcement is a real sequence with real consequences, and the time to act is before judgment, not after. A negotiated payment arrangement, or a personal insolvency agreement under the Bankruptcy Act 1966, is almost always preferable to a sequestration order.
When to bring a lawyer in
If you have received a demand under a guarantee, or you have been asked to sign one, this is the situation where professional help pays for itself quickly. A lawyer will read the guarantee and the demand together, work out which debts are actually covered and whether any demand requirements were met, and check the limitation position. They can assess whether anything in the creditor's conduct, a misrepresentation, pressure at signing, a bank's failure to comply with the Banking Code of Practice, or an unconsented variation of the underlying deal, gives you grounds to resist or set the guarantee aside. They can also negotiate the release, substitution or repayment arrangement on your behalf, and draft the deed that records it, so that a handshake does not become a dispute later. If bankruptcy is threatened, a lawyer can advise on the alternatives before the creditor's petition is filed. If you are being asked to sign a guarantee for the first time, a lawyer can help you negotiate a narrower scope, a cap on the amount, and an end date, because those terms are far easier to change before signing than after.
The demand letter is the moment to act, not the moment to panic
The single point to remember is this: the guarantee is a separate contract between you and the creditor, so the company's collapse and your resignation do not bury it. That is why the clock starts on the day the demand arrives, not the day you leave the boardroom. The exits that exist, release by consent, substitution of a new director, a finding that the guarantee was obtained unfairly, or discharge because the creditor changed the underlying deal, all require you to act early and in writing, usually before judgment is entered.
In short: read the guarantee and respond in writing, negotiate with the creditor while you still have leverage, test whether the guarantee can be set aside, and understand what enforcement means before it starts. If you have signed a guarantee, or are about to, take the document to a lawyer and get advice on your exposure and your options. The cost of that advice is small next to the debt the guarantee can put on you personally.