A personal guarantee in Australia is a legal commitment where an individual (the guarantor) promises to fulfill the obligations or repay debts of another person or entity, usually in a business context. This guarantee is often required in commercial credit agreements, particularly for small and medium-sised enterprises (SMEs). 

Key aspects of personal guarantees include: 

  1. Serious Legal Obligation: Signing a personal guarantee is a significant legal responsibility. It’s essential to be aware of the extent of liability, especially in cases of “all monies guarantees” and irrevocability clauses which heavily favor the creditor. 
  2. Different from Other Legal Concepts: Personal guarantees differ from indemnities, letters of credit, letters of comfort, and performance bonds, each having its own legal implications and conditions. 
  3. Requirements for a Valid Guarantee: A personal guarantee must meet certain legal criteria to be enforceable. This includes having the correct legal form (contract or deed), precise wording, and often, written documentation. Factors like the party’s capacity, the certainty of terms, and the absence of undue influence are crucial. 
  4. Discharging the Guarantee: Circumstances such as variations in the principal agreement, release of co-guarantors, or breach of contract by the creditor can lead to the discharge of a personal guarantee. 
  5. Legislative and Code Requirements: Personal guarantees, especially in consumer credit contracts, must comply with specific legislative and code requirements, like being in writing, signed by the guarantor, and the guarantor receiving certain documents before signing. 
  6. Enforcement of the Guarantee: In case of default, the lender can choose to proceed against either the borrower or directly against the guarantor. However, various risks might render a guarantee unenforceable, such as issues with the execution of the guarantee document or changes in terms between the creditor and the debtor. 
  7. Insolvency Considerations: Personal guarantees remain a concern in cases of insolvency, where issues like ‘unfair preferences’ and ‘uncommercial transactions’ under the Corporations Act can arise. 

In addition, litigation concerning guarantees often reveals that guarantors might not have been aware they were providing a guarantee at the time of signing the agreement. This misunderstanding usually happens when the guarantor is also a director of the company involved in the contract. It’s crucial to understand what exactly is being promised under the guarantee, as it can place the guarantor in the position of the primary party under the main agreement. 

Charging clauses within guarantees, allowing the creditor to take a charge over the guarantor’s real estate as security, are also common. Understanding and identifying these clauses is vital, as they can lead to significant consequences, including the lodging of a caveat on the guarantor’s property. 

The duration and cancellation of a guarantee are other critical aspects to consider. Generally, personal guarantees are continuing and have no time limit, meaning they can cover present, future, and sometimes past obligations. Negotiations with the involved party are typically required to terminate a guarantee. 

Lastly, the National Credit Code may apply to personal guarantees in certain situations, offering additional protections. This is particularly relevant when the credit is for personal, domestic, or household purposes, or for purchasing, renovating, or improving residential property for investment. 

In conclusion, anyone considering signing a personal guarantee should understand its implications fully and seek legal advice if necessary, given the potentially significant financial and legal consequences involved.