Personal guarantees and director liability for residential builders

Most builders run their business through a company because it keeps the business debts separate from the owner’s own assets. That separation is one of the main reasons people build through a company at all. It is also the first thing a supplier, a lender or a landlord will ask you to set aside when they are asked to extend credit to a business that has not yet earned it. The request usually arrives as a form at the bottom of a credit application, and it asks for a signature in a personal capacity.

This article explains the personal exposure a residential builder takes on through guarantees and through the duties that come with being a director. It is not a warning about insolvency in general. The early warning signs that a business is heading for trouble are covered in a separate article, and the question here is narrower. What do you personally become liable for when you sign, and what does the role of director carry with it when the company is under pressure?

This is a working explanation, not legal advice, and the rules that apply to your company depend on its structure, the documents you have signed and the state of its finances. If you are being asked to sign a guarantee, or you are a director of a company that is struggling to pay its debts, take advice from a solicitor and an accountant before you make a decision or a payment you may later have to explain.

What limited liability does and does not protect

A company is a separate legal person. The debts it incurs are the company’s debts, and the shareholders and directors are not normally liable for them just because they own or run the company. That is the protection most builders have in mind when they set up a business. It means that if a job goes badly, the claim is usually against the company, and the company’s assets are the first place a creditor looks.

The protection has limits, and they matter. It does not stop a creditor from taking action against a person who has personally agreed to be responsible for the debt, which is what a guarantee does. It does not remove duties that the law places on directors, some of which can make a director personally liable when the company trades in a way the law treats as wrong. And it does not protect a director from claims arising from their own conduct. The separation is strong, but it is not a shield that works in every situation.

Many builders discover the limits only when a supplier account is called in, a bank demands repayment or a head contractor asks for security. By then the question is no longer what the company owes but what the individual has promised, and the answer is usually in a document that was signed quickly at the start of a relationship.

What a personal guarantee actually does

A personal guarantee is a promise by an individual to pay the debts of the company if the company does not. It does not create a new debt for the business. It creates a separate obligation for the person who signed, which can be enforced against that person’s own money and assets in the event of default. The creditor does not have to pursue the company first in order to pursue the guarantor, depending on what the guarantee says.

The scope of the guarantee is set by its wording, and the wording is often broader than the signer expects. A guarantee may cover a single debt, a running account, all debts of the company at any time, interest and costs of recovery, and sometimes the costs of the creditor’s legal action. It may continue after the company has changed its name or its ownership, or after the account has been paused. Reading only the first page of the form, which is where the commercial terms usually sit, is how a builder ends up guaranteeing far more than they meant to.

The table below sets the company debt beside the personal guarantee, because the two are easy to confuse when the same creditor is chasing both.

Where builders are asked to sign guarantees

The most common request comes from a supplier that is opening a trade account for a new business. The supplier is taking a risk on a company with no track record, and the guarantee is a way of asking the director to share it. A second common source is equipment finance, a bank overdraft or a loan secured on the business, where the lender wants the director to stand behind the debt. A third is a commercial lease for a yard or an office, where the landlord asks for a guarantee for the term of the lease, which can run for longer than the business expects to last.

Clients and head contractors sometimes ask for guarantees or other forms of security, particularly on larger or public work. Those conditions are set by the contract or the tender, and they should be read with the same care as any other obligation. The guide to government tenders for small residential builders covers how those conditions usually arrive, and the answer to whether to accept them is a commercial and legal decision, not a formality.

The request is often reasonable in itself. A supplier opening an account for a builder with no history has a genuine reason to ask. The problem is not the request but the signing, which is frequently done on the same day, in a rush, without anyone reading the limits, the release conditions or the duration.

Check what the contract asks of the builder, and what it does not

The contract for the building work sets the builder’s obligations to the client. The NSW Government’s guidance on contracts for home building work is the reference for what a written contract for residential building should cover, and it is worth reading alongside any guarantee or security request that arrives during a job. A guarantee given to a supplier is a separate document with separate consequences, and it does not change the builder’s obligations under the building contract. It can, however, change the builder’s ability to meet those obligations if the supplier is called in.

Where a client asks the builder to provide security for the work, check how that security interacts with the builder’s other arrangements. A bond or a guarantee given to a client may be called on in circumstances that a trade guarantee would not be, and the two should not be assumed to sit neatly together. A solicitor who reads both documents will usually find the points where they overlap.

Directors’ duties when the company is under pressure

A director has duties to the company, and the law also expects a director to pay attention to the interests of creditors once the company is in financial difficulty. In broad terms, a director who lets the company keep trading and take on new debt when it clearly cannot pay its existing debts can be personally liable for those debts. The concept is usually called insolvent trading, and it turns on what a reasonable director would have known and done, not on whether the director meant harm.

Other choices can be questioned later too. Paying a related party, repaying a director’s loan or drawing money out of the company ahead of trade creditors can all be examined if the company fails. Records matter as much as decisions. A director who can show that they sought advice, kept proper accounts, tracked what was owed and made decisions on the information available is in a much stronger position than one who cannot explain what happened to the money.

The sensible step is to take advice early. An accountant can tell you where the company stands, and a solicitor can tell you what your duties are and whether a restructure or a formal process is the right course. Waiting until the creditors are issuing demands narrows the options and raises the stakes for everyone involved.

What insurance and compensation arrangements do not answer

Builders often assume that their insurance will respond whenever a problem arises, and that the Home Building Compensation Fund, usually called HBCF, covers the business if things go wrong. Those arrangements respond to specific events, typically defects in the work or the failure of a builder to complete a contract, and they are not the same thing as a guarantee given to a supplier or a lender. A supplier who is owed money on a trade account is not, as a rule, covered by a policy that responds to a defect claim from a client.

Ask the question directly before you sign anything. Which of your policies responds if the company is unable to pay a supplier? Does the insurance continue in the same way if the company enters an external process? What does your insurer say about your obligations if the business is in difficulty? The answers may surprise you, and they are far better learned before a demand arrives than after.

Worked example: a builder who signed for a bigger job

Consider a builder in western Sydney who was asked by a building supplier to open a trade account for a new job. The supplier required a personal guarantee for the account. The builder signed the form in the supplier’s office, did not read the limits, and assumed the guarantee would fall away once the first job was paid. It did not. The guarantee covered all debts of the company on the account, for as long as the account stayed open.

The builder took on a larger job the following year, financed partly through the account. The client paid late, a subcontractor went unpaid, and the company fell behind with the supplier. The supplier did not pursue the company first. It wrote to the builder personally, citing the guarantee, and asked for payment of the full balance. The builder had to take advice, and it was then that the scope of the guarantee became clear. A limited guarantee, capped at a stated amount and released on payment of the first invoice, would have left the builder with a manageable obligation. The actual document left the builder’s home exposed to the whole account.

The builder was able to negotiate a repayment arrangement, but only after a stressful period and at a cost that a cap in the original document would have avoided. The lesson is simple. A guarantee is a personal debt, and its limits are negotiable before you sign them, not after.

How to limit the exposure before you sign

Start by reading the whole document, including the definitions, the schedule and the terms about changes to the account. Look for the amount the guarantee covers, whether it is capped, how long it lasts, what triggers a demand and whether it can be revoked. Ask for a cap in a stated amount, a release on a specific event such as the account being paid for a set period, and a right to end the guarantee on written notice for future debts. Many suppliers will agree to some of these terms, and asking is rarely held against a builder who is otherwise a good customer.

Keep a register of every guarantee and security document you have signed, personally or through the company, with the amount, the creditor, the date and the release conditions. When a question arises about what you have promised, the register answers it in minutes. Review the register each year and before taking on a major new job, because the exposure can grow quietly as accounts are extended.

Recognising when the exposure is becoming real

The exposure under a guarantee does not become real on the day it is signed. It becomes real when the company starts to miss payments, when the supplier moves the account to a stricter footing, or when a creditor sends a letter that refers to the guarantee by name. Those are the points at which the director needs advice, not the moment the demand lands at the house. The early signs that a business is struggling are set out in the early warning signs of builder insolvency, and reading them alongside your guarantee register gives a clearer view of where you stand.

Pay attention to the company’s own records as well. A growing overdue balance, a supplier asking for cash before delivery, and a bank that has started to ask for more information are all signs that the guarantee is moving from a theoretical risk to a practical one. The earlier the adviser is involved, the more options remain open.

Where to take the question

The right people to ask are a solicitor who works with business and construction matters, and an accountant who can read the company’s accounts with you. For the rules that apply to directors in the company’s circumstances, the company regulator publishes guidance, and the advice you receive should reflect the current position rather than a summary in an article. For the building contract side of the question, the NSW Government’s guidance on contracts for home building work is the official reference. Nothing in this article replaces that advice.

The PointCPD course catalogue lists NSW builder CPD courses, and none of them is a substitute for advice on your own guarantees. The business decision to sign a personal guarantee belongs with the person who will carry it, after they have read the document and taken advice. Read it as if the business will one day fail, because that is the only time the terms will matter.

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Published 27 October 2026. General information for builders, not legal, financial or engineering advice for a specific job. Check current requirements with the relevant regulator or standard before relying on them.