Creditors may have a personal guarantee included in their terms and conditions which is an agreement by a guarantor (usually the director of a company) to fulfil the obligations of the principal debtor (being the company) for payment of all debts which are due to the creditor. To strengthen the creditor’s ability to recover their unpaid debts, the personal guarantee may also include an equitable charge whereby the guarantor grants an entitlement to the creditor to lodge a caveat (or even a mortgage) over the guarantor’s real property. However, if you do not have a personal guarantee as part of your credit application, you should consider including one so that this gives you rights to pursue recovery of a debt if the principal debtor fails to pay or goes into liquidation.

As a basic summary, the following issues should be considered for the inclusion of a personal guarantee in your agreements:

1. The personal guarantee should be carefully drafted – it should be clear, specific and include all terms which reflects the intention of the parties. For example, there are various terms which are usually included but more commonly, the guarantee should be specified to be irrevocable so that the guarantor cannot withdraw the guarantee at any stage. It should also specify that the guarantee is for “all monies” so that it covers all present debts as well as future debts which may be incurred from time to time as the business relationship continues.
2. To ensure that the guarantee is enforceable, it must be in writing, signed by all relevant parties and executed properly as required by law. A personal guarantee is usually by way of deed as no consideration is required for a deed and requires execution by the parties as signed, sealed and delivered and witnessed by an independent witness.
3. The inclusion of an equitable charge over the guarantor’s real property gives the creditor an entitlement to lodge a caveat but care must be taken to ensure it is enforceable:
   • The charging clause is proprietary in nature – it will specifically state that the guarantor charges all real property held by the guarantor (and any real property which may be acquired);
   • The entitlement to lodge a caveat over the property does not give the creditor a power of sale but the caveat will be notice to others of the creditor’s interest. The registered proprietor is also unable to take steps to sell the property until the caveat is satisfied (note, however, that caveats lodged on the basis of an equitable charge will lapse on the transfer pursuant to a mortgagee sale and without the possibility of payment);
   • Equitable charges focus on intention. The clause will demonstrate the guarantor’s agreement to charge their real property as security for their obligations under the personal guarantee. Therefore, the language of a document is crucial in determining the intent of an agreement. For example, Morris Finance Ltd v Free, Trustee of the Property of Neil Warren Brown, a Bankrupt [2016] NSWSC 51, whilst the Lease Agreement clearly granted the Lender an equitable charge, it was unclear whether the charge extended to the property which was leased. In fact, at no point did the Lease Agreement identify the specific property as the “charged property”. This uncertainty formed the basis of the dispute. The case turned on the identification of the property to be charged under the Lease Agreement. The Court concluded that the intention of the Lease Agreement as a whole was to confer a charge against the property held by the Borrower at the time of the contract with the Lender;
   • There are a range of cases on the validity and enforcement of equitable charges. In the decision of McMillan v Dunoon [2005] VSC 440, Justice Gillard of the Supreme Court was considering whether a person had a caveatable interest in property by the wording of a loan agreement. He said that the issue comes down to whether the Court can fairly gather from the words of the agreement an intention by the parties that the property referred to in the agreement was to be charged with payment of the debt. In other words, did it constitute a security? In the end it is a question as to whether or not the Court can infer from the instrument an intention to constitute a security. In that case, the loan agreement actually stated that it was a precondition of the loan advance that the borrower provide the lender with the security particularised in the schedule. The Court in that case found that it was the common intention of the parties to create a charge over the property. Therefore, it is must be abundantly clear that the guarantor agrees to provide security to the creditor by provision of an equitable charge over their “real property”.

Recently, FCW Lawyers acted for a client who was owed a substantial debt by a company and two guarantors, who had provided a personal guarantee in respect of debts owed by the company:

• Pursuant to the equitable charge contained in the agreement, we lodged caveats on the properties of the two guarantors;
• The solicitors for the guarantors demanded that we withdraw the caveats, asserting that our client had no caveatable interest, the clause containing the equitable charge was vague, the clause was apparently an unfair contract term, the clause was not expressed in plain language to be transparent to the guarantors, no specific property had been identified and the caveats had been lodged inappropriately and without a proper basis;
• The solicitor threatened to lodge a section 89A application with Land Victoria seeking removal of the caveats. Under this section of the Transfer of Land Act 1958 (Vic), a party can request that the Registrar of Titles give notice to the caveator that unless proceedings are issued to maintain the caveat within 30 days, the caveat will lapse. These applications also require the solicitor to verify that there is no proper basis for the lodgement of the caveat so this is an important requirement that the solicitor must be able to verify. If this application was made by the guarantors under section 89A, it would have required our client to either withdraw the caveats or issue proceedings in the Supreme Court to maintain the caveats (oddly enough, the letter stated that they had no instructions about the debt!!);
• With a detailed letter in response which set out the reasons why the caveats were valid including relevant case law about equitable charges and the specific wording of clauses which would support the caveats, we maintained the client’s position and indicated we would issue proceedings in the Supreme Court if a section 89A application was lodged;
• After that letter was sent to the solicitor, the entire debt (with interest and legal costs) was immediately paid in full and we withdrew the caveats. The client was very pleased with the outcome.

Catherine Pulverman of FCW Lawyers has considerable experience in this area. Having acted for creditors who seek to rely on these clauses, it is important to ensure that the agreement is properly drafted so that it is enforceable – on the other hand, she has acted for guarantors and there may be instances to raise issues with the creditor’s conduct concerning personal guarantees. She would be happy to provide any necessary advice on the relevant clauses, advice as to inclusion of these clauses in an agreement or to act for clients who seek to enforce payment of their debts against a guarantor.