Should I Act As Guarantor?

What is a Guarantor?

A Guarantor is a person who gives a promise or ‘Guarantee’ to a creditor or lender to be answerable for the debt or obligation of another (the principal debtor or borrower) if that other defaults.

Most guarantees provide that the creditor can call on the guarantor to pay the debt in full (if it is due) without requiring payment from the borrower and without exhausting the creditor’s remedies against the borrower or any securities given by the borrower.

Financial Position of Borrower

Because a guarantee exposes a guarantor to potential liability for another person’s debt without any direct benefit, logically nobody should give a guarantee. In practice however, the guarantor’s decision to give a guarantee is determined by weighing up the following:

  1. What is the borrower’s ability to service and repay the loan?
  2. What is the creditworthiness of the borrower?
  3. What is the risk?
  4. What is the likelihood of the debt being called up?

Your Obligations as Guarantor

If you choose to give a guarantee the following provides a summary of most standard guarantee documents.

  • Most guarantees are “All Obligations” guarantees, i.e. the guarantor is liable for all the principal debtor’s obligations to the creditor and are not limited to the particular transaction which gave rise to the request for the guarantee. The guarantor’s liability also extends to all debts that the principal debtor already owes to the creditor.
  • If the principal debtor has given the creditor a guarantee (i.e. is acting as a Guarantor) for yet another person or company, the guarantor will be liable for all claims against the principal debtor by the creditor relating to the other person or company.
  • If a guarantee is not limited in amount then it is unlimited.

Standard All Obligations Guarantees also provide as follows:

  • The creditor may make a demand on and bring court proceedings directly against the guarantor without bringing proceedings or making any demand against the principal debtor or any co-guarantor. In other words the creditor can choose the target — or which target he fires at first.
  • If the creditor’s claim against the principal debtor is void or unenforceable, the creditor may still have a claim against the guarantor.
  • Where there are co-guarantors, the liability of each co-guarantor is joint and several so that each co-guarantor will be individually liable to the creditor for the whole of the guaranteed obligations.
  • The guarantee is terminated in respect of future guaranteed obligations only if the guarantor gives written notice to the creditor. The guarantor will remain liable at least for the debts or liabilities which have accrued up to the giving of that notice.

A guarantor should receive a copy of the guarantee and all contracts between the creditor and the principal debtor to which the guarantee applies, at the time the guarantee is signed.

The interest rate, amount owing, terms of lending, security and other provisions which relate to the financial accommodation provided to the principal debtor may change and the guarantee will not be released by those changes. However the guarantor should have those details disclosed to him or her at the time the change is made.

Acting as Guarantor is standard fare in many commercial/lending transactions. However you should always be aware of the size of the sledgehammer the creditor is wielding. If you are asked to act as guarantor you should always seek professional advice to limit your exposure.

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