Personal guarantees are a routine part of doing business in New Zealand. Banks require them for lending. Landlords often require them for commercial leases. Suppliers ask for them as part of credit applications. Franchise systems rely heavily on them. The problem is that most business owners sign these documents without fully understanding the legal exposure they are taking on.
A personal guarantee is not a formality. It is a binding commitment that can follow you long after the business relationship ends. This article explains what a personal guarantee really means in New Zealand and what business owners need to consider before signing one.
What a personal guarantee is under New Zealand law
A personal guarantee is a written promise by an individual to be responsible for the debts or obligations of another person or company. Section 27 of the Contract and Commercial Law Act 2017 requires guarantees to be in writing in order to be enforceable. Once signed, the creditor has the right to pursue the guarantor directly for the full amount owed, even if the company itself has no ability to pay.
Joint and several liability
Most guarantees in New Zealand make the guarantor jointly and severally liable with the company. This means the creditor does not need to chase the company first. They can proceed directly against the guarantor for the entire debt. For many business owners, this comes as a shock because they assume the guarantee only activates after the company fails. In reality, creditors often pursue the guarantor as their first option because it is faster and cleaner.
Unlimited versus limited guarantees
In New Zealand commercial practice, most guarantees are unlimited. This means there is no cap on what the guarantor may be required to pay. If the business accumulates debt over years, the guarantee usually covers all of it. Limited guarantees do exist, particularly in franchise or finance arrangements, but they must be expressly drafted. If a guarantee does not clearly state a limit, it is treated as unlimited.
Continuing guarantees
Many guarantees are drafted as continuing guarantees, meaning they remain in force until the creditor agrees in writing to release the guarantor. Ending your involvement in a company, selling your shares, resigning as a director, or ending a franchise relationship does not automatically cancel the guarantee. Unless the creditor signs a release, the guarantor remains liable for obligations that arise even after they have moved on.
Cross guarantees between related companies
Group structures often contain cross guarantees where each company guarantees the obligations of the others. This can be useful for financing but is a significant risk to individual directors and shareholders. A struggling subsidiary can pull the entire group and the guarantor into liability. Understanding these structures is essential before agreeing to them.
Guarantees and insolvency
When a company becomes insolvent or enters liquidation, the creditor will likely enforce the guarantee. The guarantor then faces full repayment responsibility. If the guarantor cannot pay, they risk bankruptcy. Guarantees also commonly extend to enforcement costs, interest and legal fees. This means the liability can increase quickly once the debt is called in.
Signing guarantees under pressure
It is common for business owners to be presented with a guarantee at the last minute, often in a high pressure situation where timing is urgent. Many feel they have no choice. The law recognises that guarantees must be voluntary, but New Zealand courts generally enforce them unless there is clear evidence of undue influence or a significant imbalance in bargaining power. Simply feeling pressured is not enough to invalidate a guarantee.
How to protect yourself
The best protection is understanding what you are signing. Ask whether the guarantee can be limited to a specific amount or a specific term. Ensure you understand whether it is a continuing guarantee. Request a written release when your involvement in the company ends. Keep reliable records of any variations or changes in the credit arrangement. Most importantly, obtain legal advice before signing. A fifteen minute review can prevent life changing consequences.
The bottom line
Personal guarantees are one of the most underestimated legal risks in New Zealand business. They look simple, but their effect is significant. When a business owner signs a guarantee, they put their personal assets, their home and their financial future on the line. Understanding the scope and effect of the guarantee is essential before committing to it.
