Imagine a small construction company that supplies materials on credit to a builder. When the builder can’t pay, the business turns to the director who signed a personal guarantee—this person becomes the guarantor.
In New Zealand, guarantees like this offer a legal path to recover unpaid debts when the original debtor defaults. This article offers practical advice for Kiwi businesses, particularly the best practices and legal options when chasing payment from guarantors.
What are Guarantors?
A guarantor is a person or company that agrees to cover a debt if the original debtor fails to pay. Guarantors are often used in business credit arrangements to reduce financial risk. When a customer applies for credit, a supplier may request a guarantor as a form of backup security. If the customer defaults, the guarantor becomes legally responsible for the unpaid amount.
To be enforceable under New Zealand law, the guarantee must be in writing and signed by the guarantor. Without this, it’s difficult to take legal action.
Types of guarantor
The common types of guarantors include:
- Director guarantor – A company director personally guarantees the debts of their business.
- Personal guarantor – An individual (not necessarily a director) agrees to take on the debt if the business can’t pay.
- Corporate guarantor – Another company guarantees the debt, often used in group or parent-subsidiary company structures.
Guarantors provide an extra layer of protection when extending credit. However, businesses must clearly understand who the guarantor is and what the guarantee covers before taking action.
Best Practices When Chasing Payments from Guarantors
Chasing payment from guarantors requires a careful and well-documented approach. Acting too quickly or without the right foundation can damage your case. Outlined below are the best practices to follow when pursuing a guarantor for unpaid debts:
Have a Signed, Written Guarantee
You need a written and signed document to take legal action against a guarantor. The guarantee should clearly state the guarantor’s obligations and the circumstances under which they become liable. Without this, your chances of recovery drop significantly.
Keep Clear Records of the Debt
Maintain detailed records of the original transaction, invoices, communications with the debtor, and any attempts to collect. Guarantors often ask for proof of the debt and your efforts to recover it. Having everything documented supports your case and speeds up the process.
Send a Formal Demand Letter
Before starting legal action, send a clear demand letter to the guarantor outlining the amount owed, the reason for the demand, and a deadline to pay. This gives the guarantor a chance to respond and avoids unnecessary legal costs.
Act Within the Limitation Period
In New Zealand, you generally have six years from the date of default to take legal action. Don’t delay. Waiting too long could prevent you from recovering the debt at all.
Work with a Debt Recovery Specialist
If the guarantor won’t pay or you’re unsure about the next step, work with a debt recovery agency experienced in New Zealand’s laws. This helps you avoid mistakes and improves your chances of a successful outcome.
Legal Options for Chasing Payment from Guarantors
When a guarantor refuses to pay, Kiwi firms have several legal avenues to recover the debt. Knowing the following options helps you choose the best approach for your situation:
1. Demand Letters and Negotiation
Start by sending a formal demand letter outlining the debt and requesting payment. Sometimes, negotiating a payment plan can resolve the issue quickly without court involvement. Clear communication can save time and costs.
2. Filing a Claim in the Disputes Tribunal
For debts up to NZD 30,000, the Disputes Tribunal offers a faster, more affordable forum to resolve the dispute. The process is less formal than court and doesn’t require legal representation, making it accessible for small businesses.
3. Taking Court Action
If the debt exceeds the Disputes Tribunal limit or the guarantor disputes liability, filing a claim in the District or High Court may be necessary. Court action can enforce the guarantee and lead to judgments that allow further recovery steps like property liens or wage garnishments.
4. Enforcement of Judgments
Once you have a court judgment, you can pursue enforcement options such as seizing assets or freezing bank accounts. This step often requires professional assistance to navigate legal procedures.
If you’re having trouble chasing payment from guarantors, we at Slater Byrne Recoveries New Zealand are here to help. Our experienced team manages every step of debt recovery, giving you the best chance of success.
Reach out to us today for professional support and let us help you get what your business is owed!