Guarantees and other security

At one time or another you may be asked to guarantee someone else's loan, sign a guarantee for your own borrowings, or a personal guarantee for your company's borrowings.

Partners may have to guarantee their joint borrowings, and spouses or co-owners may have to sign to agree that a property may be set against a loan or other liabilities.

Guarantees are often presented as a routine part of a banking transaction, and almost casually offered for signature as part of closing a particular deal.

It is never routine to agree that your property will stand as security for anyone or anything - even a loan for a member of the family. If things go wrong, the holder of that guarantee will call it in and YOU PERSONALLY WILL FACE A CLAIM FOR THE FULL AMOUNT OF SOMEONE ELSE'S DEBT.

Bankruptcy or liquidation may not cancel out guarantees - if the bank is still owed money after an insolvency, it will look for any security which may remain. It could be YOU...

As a guarantor you have no rights whatsoever to know how well or how badly your guarantee is doing, nor -unless you have other close connections- do you necessarily know anything about a steadily worsening financial position until the bank tells you what you owe.

Financial institutions may prefer to pursue a known guarantor with property or a good bank balance to chasing a missing business operator who may or may not have funds. If you are a soft target, expect to defend all claims even if you may know that other guarantors exist. The bank is under no duty to pursue other options until it has tried to recover everything from you.

It isn't fair, but it is legal.

Do NOT sign any document unless

  1. You have taken independent legal advice on the situation, and

  2. You are prepared to PAY the amount of the guarantee, or LOSE the property concerned.

Not surprisingly there have been a number of court cases about guarantees, the most famous of which concerned a wife who signed a form guaranteeing her husband's business against their marital home. She was successful in defending her position and saved her share in the home - but only by showing that effectively her husband had tricked her into signing the papers which she did not understand, and she had no independent legal advice on the matter.

Do not assume that there is an automatic defense to repossession cases - the law is complicated, and each case must be considered on its own merits.

Unlimited or 'all monies' guarantees
One very good reason for recommending legal advice on guarantees is the 'Unlimited' guarantee which covers not only the specific loan or overdraft which is being negotiated - but also ANY OTHER debt to the bank. We have a number of cases reported on the helpline where such guarantees have been used to recover monies months or years after they were signed, and after the loan for which they had been signed was paid in full..

Recommendations..

NEVER, never sign a guarantee.

Accepting that you may someday have to sign something out commercial necessity -

  1. MAKE SURE that you understand the terms, and know exactly what you are guaranteeing and for how long.

  2. Get a copy of the terms in writing when the guarantee is signed.

  3. If at any stage the guarantee is no longer relevant - divorce / dismissal / company sale / resignation as director / the financial arrangement which required a guarantee is completed - GET A RELEASE. Make sure the bank agree that you are no longer a guarantor for the debt/ loan or other arrangement.

  4. If you have any difficulty with (3) COMPLAIN.

  5. If you receive any correspondence from your bank suggesting you are responsible for a debt, get legal advice immediately. Do NOT assume it is a mistake.

CASE HISTORIES

As evidence of the problems which guarantees can cause -

 

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