It is every business owner’s dream to have customers who make timely payment of unpaid invoices. That is not always the case though as delayed payments are still rampant in many industries, like the aged care industry. Business owners should not be discouraged with longer payment terms in their industry as they can make use of several approaches to get protected from non-payment.
One such debt recovery strategy is a director’s guarantee, which allows you to go after the director in cases where your customer is unable to pay their outstanding obligations. While director’s guarantees are common in bank loan transactions, you can also use them in supply transactions, especially those that your customer enters into in credit. When you use director’s guarantees properly, these can help you get paid faster and on time, improving your cash flow.
What is a director’s guarantee?
A director’s guarantee is a contractual obligation undertaken by one or more directors of a company. This is where they agree to be personally liable for a company’s debts. To use this, you can ask your customer’s director to guarantee his or her company’s obligations in the supplier credit agreements.
How does a director’s guarantee work?
A company is a juridical entity that can enter into a contract. When your customer, for example, does not pay for the supplies you already delivered, the law allows you to sue only that company. Your customer’s directors are shielded from those liabilities under the so-called “corporate veil.”
In certain instances, however, you can pierce that corporate veil and go after the director(s) of your customer. One of those instances where you can pierce the corporate veil is when the director entered into a director’s guarantee.
Types of director’s guarantees:
There are two types of director’s guarantees:
- joint or several guarantee
- all moneys guarantee
Joint or several director’s guarantee
If your customer has multiple directors, they might sign a “joint and several” liability. This type of guarantee may lead to three scenarios in cases of non-payment by your customer:
- pursue all of your customer’s directors,
- chase some of your customer’s directors, or
- go after a single director.
All moneys guarantee
An “all moneys/all accounts” guarantee makes the director liable for all the debts and financial obligations of the company. This is regardless of when or how the obligations arise. While an all moneys guarantee may seem ideal, the director’s ability to pay may also be dependent on whether he or she is solvent.
In some instances, the director will ask to limit his or her liability up to a certain amount knowing that any final amount the company may owe under the credit supply agreement may end up being a lot more than what the director signed up for.
TIP: In all contractual agreements, including director’s guarantees, it is best to seek legal advice from commercial dispute lawyers. This is to make sure you are clear as to your relationship and financial obligations.
Where can you check if he or she is the actual director?
We suggest that before doing business you conduct a little bit of due diligence and get your client’s ABN or ACN. These are unique numbers that are given to entities including small businesses and family enterprises after they have registered with the proper Australian government agencies. A search into the ABN Lookup will reveal, among other things, when the company was registered and what name it is trading under.
While the ABN or ACN lookup may not lead you to the identities of the directors of your customer, the Australian government started the DIN or director’s identification number where you can look up whether that director is the actual director for your customer. All directors of a company, a registered Australian body, a registered foreign company or an Aboriginal and Torres Strait Islander corporation will need to apply for a unique 15-digit DIN.
How does your debt collection strategy benefit from a director’s guarantee?
When your supplier credit contract is backed by a director’s guarantee, you can go after the director’s personal assets in the event your customer is unable to pay its obligations.
Director’s guarantee case study 1:
Director’s guarantee case study 2:
You can also list the director with a credit rating agency, where the director gets a credit default and won’t be able to incur debts for at least five years.
To enforce any court judgment, you can ask a court to seize the director’s property or place the director in bankruptcy. You can also ask for the issuance of garnishee orders.
What terms can you include in the director’s guarantee that can give you maximum protection for payment?
One way to guarantee any recovery is to include in the director’s guarantee a charge – giving you an interest in any personal property the director owns.
You can also add a protective clause that will require the director to pay any legal costs or other costs that you may incur while trying to collect the amount under the guarantee. These costs include debt collection agency fees and costs that a court may order.
Can you still go after the director even when he/she has stopped being director of your customer?
Depending on the terms of the director’s guarantee, the liability may be continuing and unlimited. This means that you can still go after the director even when he or she stops acting as director, or the contract with your customer ends, or even when your customer stops trading or is in liquidation.
Takeaway
If your existing contracts that include a director’s guarantee are not helping you collect unpaid debts, it’s time to review the terms and conditions contained in those contracts as they may warrant an update or an amendment. As in any contract, the director’s guarantee should be written in clear terms, and any amendments should be reviewed by, ideally, commercial lawyers.
Other ways you can improve your debt collection
- Get your customer’s ABN and/or ACN
- Avail of credit defaults
- Use statutory demands
- Ask for a garnishee order
- Maximize statutory benefits, like demanding shorter payment terms in the construction industry
- Explore other modes of getting in touch with your clients, such as using WhatsApp
- Write an effective letter of demand
- Use e-invoicing to reduce payment time and invoicing errors
- Draft better terms and conditions
- Consistently update your credit applications
Liam White joined the Slater Byrne Recoveries team in early 2013. He has worked across the credit & dispute resolution industry for a number of years. He is currently National Head of Sales at Slater Byrne Recoveries.