A charging clause is a term of an agreement that creates a security for a creditor over assets you own. Most commonly charging clauses are found in personal guarantees in credit applications.
Often when a business owner signs a credit application for their business, they don’t know that they are signing a personal guarantee let alone a guarantee, which has a charging clause. However, the risks and impacts of guarantees with charging clauses can be significant.
When might you sign an agreement with a charging clause?
Any creditor of your business who you enter into a contract with, may include as a term of the contract a personal guarantee and a charging clause. This may include:
- Certain lenders;
- Landlords; and
- Particularly trade creditors and suppliers.
What is the wording of charging clauses?
There is no standard wording for a charging clause and the precise wording can differ. However, often the clause will contain words to the effect that “the guarantor charges all of their property both now and in the future for the payment of all monies owed”.
The common theme though for charging clauses is that you will be charging your assets or property as security for payment of a debt which your business owes.
What is the effect of a charging clause?
If you sign a credit application or agreement for your business with a personal guarantee and charging clause and the supplier who provides the agreement is not paid, you will personally have to pay the debt. Additionally, the supplier will gain the status of a secured creditor in respect of property that you own.
In particular, charging clauses will grant security over your interest in any real property that you own, either solely or jointly.
Where you have signed a personal guarantee with a charging clause and you own a house or another property, the creditor with the benefit of the charging clause can lodge a caveat over the property (which is somewhat similar to a mortgage). If you do not pay the debt owed, they can make an application to Court and obtain an Order that a third party be appointed to take possession of the property and sell it.
What can you do about charging clauses?
The first thing to do is read contracts or agreements that you sign. If a contract or agreement contains a guarantee and a charging clause you should consider whether you can use (for example) a different supplier.
Additionally, if you are in business, you should look at your asset structuring outside your business, so if possible, you own limited or no assets, particularly real property, as if your business fails these assets will be subject to claims by your businesses’ creditors.
Lastly, if you have signed personal guarantees including those containing charging clauses, you should get professional advice before you take any further action. This is where we can help as we can advise on the options available and assist you to implement any solutions to solve your problems.
Contact us for advice and assistance
So, if you have you have a business which has failed and you think you are at risk because you have personal guarantees, including those which contain charging clauses, please get in contact with us on 1300 906 966 or send us an email at email@example.com