Company Guarantees In New Zealand: Directors’ And Shareholders’ Obligations

If you run a small business, chances are you’ll eventually be asked to sign a company guarantee - especially when you’re applying for finance, signing a commercial lease, or trying to open a new supplier account.

This can feel like a “standard form” admin task, but it’s one of the biggest legal risk decisions you can make as a director or shareholder. A company guarantee can significantly reduce the limited liability protection you expected when operating through a company.

In this guide, we’ll walk through what company guarantees are in New Zealand, when you’re likely to see them, and what legal obligations (and personal risks) directors and shareholders should understand before signing.

What Is A Company Guarantee (And Why Does It Matter)?

A company guarantee is a legal promise that someone (usually a director, shareholder, or related entity) will pay or perform the company’s obligations if the company doesn’t.

In practice, it usually works like this:

• Your company signs a contract (for example, a loan, lease, or supply agreement).
• The other party wants extra security because your company might not have enough assets (or a long trading history).
• They ask you to sign a guarantee, meaning you may become personally responsible if the company can’t pay.

This is why company guarantees matter so much: the whole point of operating through a limited liability company is usually to separate business risks from personal assets. A guarantee can reduce that separation - sometimes dramatically.

Guarantee Vs Indemnity: Why The Wording Matters

Many “guarantees” are actually drafted as a guarantee and indemnity. This is important because an indemnity can create broader and more direct liability than a traditional guarantee.

For example, depending on the wording and the circumstances, a guarantee may be framed so the company’s default is the trigger for the guarantor’s liability, while an indemnity can sometimes allow the creditor to claim from you more directly (without the same hurdles). The practical effect comes down to the drafting.

It’s common to see this in a Deed of Guarantee and Indemnity, which is often used in financing, leases, and other higher-risk arrangements.

Does A Company Guarantee Create Personal Liability?

Yes - that’s the core purpose of the document. If your company can’t meet its obligations, the guarantor may have to pay personally.

That can include:

• unpaid invoices or loan amounts
• interest and default interest
• legal costs (sometimes on an “indemnity” basis)
• damages claimed under a contract
• costs of enforcing security (if there’s also a security interest involved)

If you’re a director, it’s also worth understanding that guarantees sit alongside (not instead of) other risk areas, including personal liability as a company director in certain circumstances.

When Are Directors And Shareholders Asked To Sign Company Guarantees?

Small businesses are asked to provide company guarantees all the time. It’s usually not because anyone thinks you’re untrustworthy - it’s because the other party is managing risk and negotiating leverage.

Common situations include:

Commercial Leases

Landlords often ask for director guarantees, especially where the tenant company is newly incorporated, has limited assets, or is signing a long lease term. In some cases, the landlord may also require additional security (like a bond or bank guarantee).

Lease arrangements can also involve additional documents like an assignment or change of tenant, and guarantees can “follow” the lease unless carefully dealt with during an exit.

Bank Loans And Business Finance

Lenders frequently require personal guarantees from directors and sometimes shareholders - even where the business is operating through a company. The lender may also register security over company assets.

This is where documents like a General Security Agreement can come into play alongside (or in addition to) a personal guarantee.

Trade Credit And Supplier Accounts

Many supplier “credit applications” include a personal guarantee clause in the fine print. It can be easy to miss because the document looks like a simple onboarding form.

But if the company later has cash flow issues, that guarantee can be what turns a business debt into a personal debt.

Equipment Hire, Asset Finance, And Service Contracts

Hire arrangements, equipment leases, and ongoing service agreements sometimes include guarantees - particularly where the supplier provides expensive equipment upfront or offers a “pay later” structure.

Buying Or Selling A Business

If you’re buying a business, you might be asked to give guarantees while the business transitions or while finance is arranged. If you’re selling, you’ll want to ensure you’re released from any guarantees connected to the business after completion (otherwise, you could stay on the hook even after you’ve exited).

This is one reason careful Legal Due Diligence matters - guarantees and security arrangements are easy to overlook until there’s a dispute.

What Legal Obligations Apply To Directors And Shareholders Who Sign Guarantees?

A company guarantee is primarily a contractual obligation. That means the starting point is that if you sign it, you’re likely to be bound by its terms. While there can be limited exceptions in some situations (for example, misrepresentation, undue pressure, or unfair conduct), you generally shouldn’t assume you can avoid liability simply because you didn’t read or fully understand the document.

But there are also some bigger legal obligations and practical realities that directors and shareholders should keep in mind.

Directors’ Duties Don’t Stop Because It’s “A Finance Thing”

If you’re signing a guarantee as part of running the business, it’s not just a personal decision - it’s also connected to your role as a director.

Under the Companies Act 1993, directors have duties including (in plain English):

• to act in good faith and in the best interests of the company
• to exercise care, diligence, and skill
• not to allow reckless trading
• not to incur obligations the company can’t perform (in certain circumstances)

If your company is under financial pressure, decisions around borrowing, signing new contracts, or extending credit terms can become legally sensitive. Even if a guarantee is “your personal risk”, the broader transaction might still need to be approached carefully.

Shareholders: You’re Not Automatically Liable, But Guarantees Change That

Shareholders generally benefit from limited liability. In most cases, shareholders aren’t personally responsible for company debts just because they own shares.

However, if a shareholder signs a guarantee, they’re stepping into personal liability by contract.

This can be particularly important in businesses with multiple owners, where one person signs “because they have the house” or “because the bank required it”. If only one shareholder guarantees, the risk isn’t shared equally - and that can create tension later.

A well-drafted Shareholders Agreement can help manage this by setting rules around:

• who is allowed (or required) to give personal guarantees
• whether the company will indemnify the guarantor (where appropriate)
• how risk is shared between shareholders if a guarantee is called upon
• exit arrangements and what happens if a guarantor leaves

Guarantors Often Have “Joint And Several” Liability

If more than one person guarantees the same obligation, the guarantee may be joint and several. This usually means the creditor can pursue one guarantor for the full amount, not just their “share”.

Guarantors might then have to sort out contribution between themselves - which is rarely fun, and often expensive.

Continuing Guarantees Can Outlive The Relationship

One of the most common surprises with company guarantees is that they can be drafted as “continuing” guarantees - meaning they keep applying to future obligations, renewals, or extensions.

So even if you stop being a director, sell your shares, or leave the business, you may still be liable unless you’re formally released (and the wording supports your release).

What Should You Check Before You Sign A Company Guarantee?

Before you sign a company guarantee, it’s worth slowing down and reviewing the deal like it’s a real risk decision - because it is.

Here are key items to check (and negotiate where possible).

1) Exactly What Is Guaranteed?

Look for whether the guarantee covers:

• a specific contract only (e.g. “the lease dated…”) or all dealings
• only money payable, or also performance obligations
• variations, renewals, or extensions of the underlying agreement
• interest, enforcement costs, and indemnities

If the wording is broad, your liability may be broader than you expect.

2) Is There A Limit (Cap) On Liability?

Some guarantees are unlimited. Others include a cap (for example, “up to $50,000 plus costs”).

From a small business perspective, negotiating a cap is often one of the most practical ways to reduce personal exposure - especially if the company’s obligations could grow over time (like a rolling supplier account).

3) Are You Also Signing An Indemnity?

As mentioned earlier, “guarantee and indemnity” language can be a red flag if you’re expecting a standard guarantee.

Don’t assume the word “guarantee” in the title means it’s limited. The detail matters.

4) When Can The Creditor Enforce The Guarantee?

Check whether the creditor must first take certain steps (like making a formal demand, or relying on a default under the main contract) before pursuing you, or whether they can come directly to you. This depends heavily on the drafting and the structure of the guarantee/indemnity.

Also check whether the creditor can enforce even if they’ve given the company extra time, changed terms, or taken other enforcement steps. Many guarantees are drafted so that changes to the underlying deal won’t affect your liability.

5) What Security Is Being Taken (If Any)?

A guarantee is often paired with some form of security (like a security interest over company assets).

If security is involved, understand the practical consequences. For example, if there’s a default, the creditor may seize or sell business assets, and still pursue guarantors for any shortfall.

6) Are You Signing In The Right Capacity?

Many business owners accidentally sign in multiple capacities, such as:

• as director signing for the company
• as guarantor in your personal name
• as trustee (if you hold assets through a trust)

Each capacity can create different legal consequences. If you’re unsure, it’s worth getting advice before signing.

How Can You Reduce Risk When A Company Guarantee Is “Non-Negotiable”?

Sometimes, the other party won’t remove the guarantee entirely - especially if your company is new, the contract value is high, or you don’t have other security to offer.

Even then, you often have options to reduce risk.

Negotiate The Terms (Not Just The Existence)

If you can’t remove the guarantee, consider negotiating:

• a liability cap (a maximum amount)
• a time limit (e.g. guarantee ends after 12–24 months if the account is in good standing)
• release triggers (e.g. once the company meets certain financial criteria, or after consistent payment history)
• notice requirements before enforcement
• exclusions (e.g. not covering consequential loss, or not covering future variations without consent)

Align Your Internal Governance Documents

If you have multiple directors/shareholders, it’s smart to align your internal documents so everyone understands the rules around personal guarantees.

For example, your Company Constitution and shareholder arrangements can help clarify decision-making authority, approvals, and what happens if a guarantee is required for growth.

This isn’t just “paperwork” - it can prevent disputes later if the business hits a rough patch.

Get Clarity On Exit And Release

If you’re signing a guarantee, think ahead: what happens when you leave the business, sell your shares, or step down as a director?

In many cases, you’ll need a formal release from the creditor, and you may need someone else to replace your guarantee. Planning this upfront gives you more negotiating power (rather than scrambling during an exit).

Don’t Ignore Conflicts Of Interest

In small businesses, it’s common that one person wears multiple hats - director, shareholder, employee, and guarantor. That’s normal, but it can create conflicts when decisions are being made about taking on risk.

Directors should stay mindful of their duties and decision-making processes, and make sure key risks are properly considered and documented.

Understanding concepts like fiduciary duty can help you frame those responsibilities in a practical way, particularly where you’re making decisions that affect other shareholders.

Key Takeaways

• A company guarantee can make you personally responsible for company debts and obligations, reducing the protection you normally get from operating through a company.
• Directors and shareholders are commonly asked to sign guarantees for leases, loans, supplier accounts, and other high-value or ongoing contracts.
• Many company guarantees are drafted as a guarantee and indemnity, which can significantly broaden your liability - the detail matters more than the label.
• Before signing, check what obligations are covered, whether liability is capped, whether it’s a continuing guarantee, and what enforcement rights the creditor has.
• Even when a guarantee is required, you can often reduce risk by negotiating terms (like caps and time limits) and aligning internal documents like a Shareholders Agreement and Company Constitution.
• If you’re exiting a business, don’t assume your guarantee ends automatically - you’ll often need a formal release.

This article is general information only and does not constitute legal advice. If you’d like advice on your specific situation, you should speak with a lawyer.

If you’d like help reviewing or negotiating a company guarantee (or setting up your internal documents so everyone’s clear on the risks), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.