Business owners know it is very difficult to borrow money for the business
from a creditor without a personal guarantee even if the creditor has security
against all of the business. If you sign the typical standard guarantee form
used by creditors, you may be giving up rights designed to level the field. Some
terms of the creditor guarantee are not in your best interest. .
But what is a guarantee, what defences do you as a guarantor have and what
are your rights? If you must pay under the guarantee, can you recover the money
and how? Before you sign a guarantee, whether to support your business, or
to help a relative or friend, you should know the answers to these questions.
You should also consult a qualified lawyer to make sure the guarantee is not any
broader than absolutely necessary.
A guarantee is a contract between the guarantor (the person that gives the
guarantee) and the creditor (typically the creditor that makes the loan). As a
contract, it must meet the essential conditions
required to form a valid and enforceable contract. There must be certainty of
the terms of the guarantee: what is the extent of the guarantee, when can the
creditor call for performance under the guarantee, and how can it be revoked.
There must be some consideration for the guarantee as with all contracts.
Usually this is the loan made to the business. It could also be an agreement to
hold off taking some action that the creditor is otherwise entitled to take, or
allowing more time for the business to meet its obligations to the creditor
under the existing arrangements. The amount or nature of the consideration does
not matter as long as there is some consideration.
The guarantee is normally in written and signed by the guarantor. But a
guarantee can be enforceable even if it is not in writing; the guarantee could
be implied from the conduct of the parties such as a partial payment after a
promise relied upon by the creditor to provide credit to the debtor.
By giving the guarantee, the guarantor promises to carry out the obligations
of the third party (the debtor) if the debtor fails to do so. If you guarantee a
loan made to the black sheep of the family, then you agree that when the loan is
not paid by the black sheep, you will make payment. The guarantee is usually of
a loan. But, you can guarantee any type of obligation.
In practice the creditor wants a "standard form" of guarantee where
the guarantor waives various rights or defences available at common law. For
example, at common law the creditor would normally be required to protect the
security of the debtor; not allow the security to be lost or sold for less than
fair value; not change or alter the terms of the loan with the debtor; not do
anything that would materially alter the risk assumed by the guarantor; and not
give up claims of the creditor against the debtor. If the creditor allows any
this to happen, then the guarantor could be released from the guarantee. Most
guarantees require the creditor to give up these defences or rights. With proper
legal advice and some negotiation, you can retain many of these rights or at the
very least limit the circumstances under which you give up your rights.
Even if you have signed a standard form guarantee, certain defences may still
be available to you. Do not assume that if you signed a guarantee no defences
available against claims of the creditor. An essential requirement for a valid
guarantee is mutual consent: both the creditor and the guarantor intended there
be a guarantee. That is, when you signed the document, it must be clear you
intended to give a guarantee. Sometimes you sign a document without realising
that it contains a guarantee. Be forewarned however your signature will raise a
presumption you intended to enter into the very same contract or agreement as
set out in the document you signed.
At times a person may feel there is not choice but to provide the guarantee;
it is to help a family member with a new business, or your company needs the
loan to continue an expansion programme. However, if you provide the guarantee
because of what the law considers to be duress or undue influence, then the
guarantee will not stand up in court. The creditor can not always act only in
its own best interest. Depending on the circumstances, the creditor may owe a
fiduciary duty to the person asked to provide the guarantee. If this duty
exists, and the creditor acts in breach of the duty, then the creditor can not
rely upon the guarantee.
Another defence is "non est factum". Here the guarantor is really
saying that the guarantee alleged is so fundamentally different from the
agreement he thought he was making that he could not have intended to make the
guarantee. But again if the document signed by you contains the guarantee; it
will be difficult to raise such a defence. The appropriate facts to support such
a defence might be found if the guarantor cannot for some reason read or
understand the language. It may also be found if in signing a new or replacement
guarantee the terms of the guarantee are changed without the knowledge of the
If the creditor made any commitments to you about the guarantee, it is
important that those commitments be in the guarantee. Many individuals have
tried to argue that the creditor promised not to use the guarantee; or that the
guarantee would only be used if some other person did not pay. Such commitments
are not binding on the creditor unless they are in writing and, normally,
contained in the guarantee document.
If you pay the creditor, you have the right to recover that money from the
debtor. You are also entitled to take an assignment of the creditor's rights
against the principal debtor. Of course these rights have value only if the
debtor has the means to pay you.
Most creditors insist that the guarantor get independent legal advice from a
solicitor before the guarantee is signed. This is to ensure that the creditor
can enforce the guarantee if necessary. You should insist on getting independent
legal advice from a solicitor qualified in business law to protect your rights.
If you have any questions on the issues discussed above, or
on business law in general, please contact Sucha S. Ollek at: firstname.lastname@example.org.