Personal Guarantees and their Role in Debt Collection

Businesses have been hit hard by the financial fallout of Covid-19 this year, unfortunately leading some to go into liquidation. If you’ve had a client in this situation, you may have been lucky enough to get paid before this happened, but under NZ law, payments prior to liquidation could be requested back by the liquidator as insolvent transactions.

In cases like these, how can you mitigate against this happening? Many creditors are now including personal guarantees in their credit applications and their value comes to the fore in situations of insolvency.

What is a personal guarantee?
In essence, an individual associated with your client guarantees the payment of the debt of a company (i.e. your business). That individual is usually a shareholder, director or someone with a financial interest. Personal guarantees can be also provided by multiple guarantors, companies or trustees.