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Company Directors: Is the guarantee worth it? - 2 June 2016

Earlier this week the Queensland Court of Appeal dismissed an application for leave to appeal a decision of the District Court in relation to proceedings brought by the Bank of Queensland against two directors who made a personal guarantee of a $500,000 loan to their company (which is now in liquidation).

Whilst this particular case provides no extraordinary legal implications or principles, it serves as a reminder that directors of companies need to be cautious and diligent to avoid being held personally liable for a company’s debts.   

It is a fundamental principle of company law that the identity and existence of a company is separate to that of its shareholders and controllers. The principle provides a shield or veil of protection for directors in their day to day operation of a company. However, there are circumstances where this ‘separate entity’ principle will not apply.

Possibly the most common way that directors will become accountable for a company’s liability is when the director has made a personal guarantee in respect of the company’s obligations. The law is only able to protect the directors of a company so far as they seek to protect themselves.   

A director’s guarantee is a serious undertaking which allows a lender to hold the director personally liable to pay any debts if the company is unable to meet its obligations. It is not uncommon for a lender to require a director to guarantee a loan and with a company that has minimal assets, the giving of a guarantee can be a serious decision and it will place a significant financial risk on the individual.

The case highlights the common situation directors might find themselves in on the back side of what seemed to be a bright future. These kinds of cases highlight the value of seeking advice before entering into transactions which will bind the company, and more importantly those that bind the individual. 

HopgoodGanim Lawyers is a legal firm of trusted experts. Founded 40 years ago, the HopgoodGanim of today remains fiercely independent and proud of our sustained growth and ongoing success. We deliver exceptional commercially-focused legal advice to clients throughout Australia and internationally and in addition to our corporate and commercial teams, we also house one of Australia’s most highly regarded family law practices.

Billy Young | Law Graduate
Corporate Advisory & Governance
P: +61 7 3024 0463
E:  b.young@hopgoodganim.com.au