Thinking about signing a personal guarantee for someone? Think again.
Guarantees are a powerful tool to secure a loan or some other agreement. Old English cases, which pre-date the dinosaurs, describe them as contracts made between a guarantor and a creditor in which the guarantor will answer for the debt or obligation of the debtor should the debtor default on their contract with the creditor. A normal person would describe them as a promise to ensure another person will uphold their end of the bargain, and bite the bullet should they fail.
Often a lender will want a guarantee when loaning money. This gives them more pockets to pick from if you can’t pay.
So, what do you do if you are asked to give a guarantee?
The bare minimum would be:
- Read the guarantee. Seems obvious but you’d be surprised. If you don’t understand it, that’s not good. Know what you are getting into and the potential consequences.
- Do your homework. Who are you promising to back? Are they trustworthy? Are they financially secure enough to service the loan? Do they have a history of reneging on promises? Are they likely to default on their contract? Some food for thought.
- Obtain legal advice. If you are still unsure, a short advice that won’t break the bank is always an option, especially if you are guaranteeing a large loan or a valuable contractual promise. It’s always best to know how deep the water is before you dive.
These next two parts are for the law nerds.
Death and taxes… and guarantees?
A guarantee is just another term of a contract, and the wording matters. Generally, the wording makes the guarantee irrevocable and continuing, even if the guarantor dies. This means the obligations promised under the guarantee would pass to the guarantor’s estate, which could make for an annoying (and expensive) piece of litigation for your executor to deal with.
Two birds, one stone
Multiple guarantors are common. For example, a company takes out a loan, and the two directors of the company offer personal guarantees in case the company cannot pay. Shock and horror, the company defaults. What happens?
The guarantors are liable. But how? Do they pay 50/50? Can the lender choose whom to sue to get the money back? What if one of them goes off grid? Is the other stuck with the full amount?
The answer, being every lawyer’s favourite answer, is: it depends.
It depends on what the guarantee says, which could provide for:
- Joint liability, meaning the guarantors together promise to pay the whole amount. Both are on the hook for the entire amount, and the creditor generally has to come after them both.
- Several liability, meaning each guarantor is responsible for a portion of the total, such as 50/50 or 70/30. Each guarantor will have to be sued separately for their part, and if one pays, that doesn’t reduce the amount the other has to pay.
- Joint and several liability, meaning both guarantors are on the hook for the whole amount and each can be sued separately for all of it.
If you provide a guarantee with another person, you will probably want this spelled out.
Want to chat about guarantees? Give us a call.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
Article Written by James Cutrone, Law Graduate
