Personal Guarantee

Not Just a Personal Matter

The Myth: Many people think that a bank guarantor only gives a reference of good character of the borrower.

The Truth: In reality, a bank guarantor is legally bound to pay back the loan if the borrower cannot or will not pay.

This article provides basic information on the details and implications of bank guarantees given by individuals and aims to increase the general reader’s understanding of guarantees.

Who is a Personal Guarantee?

A personal guarantee is a legal contract that binds you to pay the debt of the borrower if the borrower fails to do so. A guarantee signifies that the lender can lay claim to the guarantor’s assets in case the borrower defaults. Once signed, a personal guarantee can only be cancelled with consent of the lender.

Why Financial Institutions Seek Personal Guarantee?

A financial institution may require a guarantee as a means to enhance the credit standing of the prospective borrower and thus enabling her to obtain financing.

Who can be a Guarantor?

Anyone can be a guarantor as long as the person meets the legal requirements to be a guarantor. However, since a guarantor would be liable to pay the debts of the borrower in the event the borrower defaults, you should consider becoming a guarantor only if you are sure that you can pay the debts of the borrower in the unfortunate event that he/she fails to do so.

The legal requirements of a guarantor include the following:

• Must be eighteen years old or above,

• Must not be bankrupt,

• Must be of sound mind and have the mental capacity to understand the guarantee document and the responsibilities and obligations of a guarantor,

• Must have freely consented to being a guarantor (i.e. should not have been forced or must not have entered into the contract under undue influence, fraud, misrepresentation or by mistake).

However, the final decision whether or not to accept you as a guarantor lies with the financial institution.

Types of Personal Guarantee

A loan can be guaranteed by one or more guarantors. However, this does not mean that the liabilities of the guarantors are shared equally amongst themselves. The financial institution has the right to recover the debt wholly or partially from any of the guarantors.

You should seek professional legal advice on the legal implications of the guarantee before signing.

Joint Guarantee

 Under a joint guarantee, each guarantor is individually liable for whatever obligation they have together.

For example, if a couple becomes joint guarantee for a mortgage loan, they are jointly liable for the amount of the loan. If one of them passes away, disappears or is declared bankrupt, the other remains fully liable for any remaining amount.

Several Guarantee

Several guarantee is the opposite of joint guarantee, where the parties are liable only for their respective proportionate obligations.

For example, if three business partners co-borrow money for their small business and the loan agreement states that they are only severally liable, the lender may only sue the partner who fails to fulfill his obligation.

Joint and Several Guarantee

 When two or more individuals sign joint and several liabilities, a creditor may sue any one of the guarantors. If a creditor recovers money from one guarantor, that guarantor may pursue the other partners for their respective share of obligation.

For example, if three business partners enter into a contract for which there is joint and several guarantee and the contract is subsequently breached, one of them may be sued and may end up paying all losses. It is then that partner’s responsibility to pursue the other partners for their share of the liability.

Rights of a Guarantor

There are certain rights accorded to you as a guarantor before and after signing the contract of guarantee. These include

• The right to obtain a copy of letter of guarantee and any other documents in relation to the loan transaction,

• The right to seek advice from your lawyer before signing the contract of guarantee,

• The right to information on the outstanding balance of the account of the borrower with the financial institution subject to the borrower’s consent,

• The right to call upon the borrower to pay off the loan to release you from all your liabilities under the guarantee. This right can be exercised at anytime and even before the financial institution has called upon the borrower to pay the debt. However, this right may be subject to the terms and conditions of the loan, which may vary from customer to customer,

• The right to be indemnified by the borrower for any payment made to the financial institution. This means that you can sue the borrower for the amount that you have paid to the financial institution.

Liabilities of a Guarantor

More often than not, guarantors willingly sign the contract of guarantee without fully realizing the impact it may have in the future. Therefore, it is extremely important for a prospective guarantor to read and fully understand the contract of guarantee before signing. Below are some points to explain the liabilities of a guarantor.

• The extent of the liability of a guarantor will be as specified in the guarantee document,

• A guarantor may be held liable for the liabilities of the borrower in accordance with the terms of the guarantee document,

• A guarantor can only be rendered liable under a guarantee if the borrower is in default of any payment to the financial institution and the financial institution makes a demand on the guarantor.

Limitation of Action Against Guarantors

• Where a guarantee is made payable on demand, a financial institution cannot bring an action against the guarantor until a demand has in fact been made under the guarantee against the guarantor,

• Depending on the provisions of the contract of guarantee, a demand may be served by hand, by ordinary post, by registered mail or public notice.

Discharge of Guarantors

• A guarantor is released from his obligations under a guarantee upon full payment of the debt owing to the financial institution,

• For a guarantee to be enforceable against the guarantor, the terms of the guarantee must be adhered to by the financial institution.

Do’s and Don’ts

Read and understand the nature of the guarantee. A prospective guarantor must not sign a document that he has not read or sign a document which is in fact a blank form or a partially completed form. A person signing such a document would have no defense in law should he decide to challenge it in the court of law. You should seek professional legal advice on the legal implications of the guarantee before signing.

Do not Sign any Guarantee if you

• Do not have a financial, business or moral interest in the transaction and are uncertain as to the nature of the transaction,

• Have doubts as to the ability or integrity of the borrower,

• Feel that you are under undue pressure or duress to do so,

• Do not understand the terms of the guarantee and do not have an independent party explaining it to you,

•  Believe that you have no capacity to settle the debts of the borrower if he fails to pay.

Believe that you have no capacity to settle the debts of the borrower if he fails to pay.

Always ensure That

• The maximum amount to be guaranteed is clearly stipulated and whether it is inclusive of accrued interest,

• You are aware of your liabilities in the event that variations are made to the terms and conditions of the loan,

• In a joint or joint and several guarantee, all the guarantors sign the guarantee,

• The name of the borrower is clearly stated on the guarantee document,

•You seek clarification or explanation on any of the terms of the guarantee, if in doubt. If necessary, seek legal advice before signing.