Welcome to part 2 on “As a guarantor, what are my duties?” Here we will take at look at the kind of information you will need from the lender, the types of legal documents you might come across, and what to consider about the borrower and their financial history when deciding whether or not to provide a guarantee.

What information should you obtain if you provide a guarantee?

Under no circumstances should you enter into a loan agreement as a third party guarantor without first being provided with the following documents:

  1. A copy of the loan agreement in its ready-to-be-signed form, so a full and comprehensive review of the terms and conditions can be carried out by you (or your lawyer); and
  2. A clear and concise document that explains the rights and duties of a guarantor.

On any guarantee there must be notice provided to the prospective guarantor that states:

  1. That the guarantor should seek independent legal and financial advice in relation to the guarantee and how it may effect the guarantor if the borrower defaults;
  2. That the guarantor may, if they wish, refuse to become the guarantor to the loan; and
  3. That becoming guarantor involves a level of financial risk that should be carefully considered.

It is a requirement that the Bank inform the guarantor in regards to any notice of demand given to the debtor, as well as any overdrawn accounts in connection with any loan facility the debtor currently has or previously had with the Bank.

What legal documents do guarantors need to understand?

There are a number of legal documents that a guarantor should have a good understanding of, as they explain what the guarantor’s rights and obligations will be under the loan agreement. From these documents, a guarantor should be able to answer the following questions:

  • Is the guarantee limited to a specific transaction, or an “all accounts” guarantee?
  • What kind of time limit has been placed on the guarantee, limited or unlimited?
  • What level of financial liability does the loan agreement impose on the guarantor, limited or unlimited?

Understanding the financial history of the debtor

Ask yourself whether you are confident and comfortable with becoming the guarantor. Keep in mind, you’re the one taking all the risk and, for this and other reasons, you would be wise to obtain some assurances from the borrower as to their viability to repay the debt and trustworthiness.

Are you being asked to provide collateral (security) for the guarantee, such as your house or other substantial assets? If so, you should investigate the following:

  • What is the transactional history between the lender and the debtor?
  • Has the debtor at any stage been in default of any debts?
  • Does the debtor hold any securities and assets?
  • How established is the debtor’s business for which they seek a loan? Is it financially viable and likely to grow?

It is always a good idea to have a lawyer and an accountant assist you with conducting due diligence on the debtor business owner, as they will be able to give you a more accurate picture as to likelihood of commercial success and the level of legal risk if the debtor does end up defaulting.

In what capacity are you signing the guarantee?

Another important consideration that rarely receives much attention is the capacity in which you, as guarantor, are signing the loan agreement. Are you a director, and, if so, is there any benefit to the company? Understand your duties as a director, as they may conflict with your being a guarantor in certain circumstances. Otherwise you may be signing as trustee of a trust, in which case it would be worth finding out whether the guarantee extends beyond the trust assets. If you are not acting for the benefit of the trust (and its beneficiaries), the trustee may no longer be indemnified from liability for the (loss of) trust assets.

Conclusion

In case you are considering becoming the guarantor of a loan agreement, first have a think about the above risks. Speak with a lawyer and financial adviser about conducting due diligence on the business for which the debtor is seeking a loan, as this will help determine the financial viability of the business. Once you’re confident that the debtor will meet its repayment obligations, contact LegalVision on 1300 544 755 for assistance with reviewing the lender’s loan agreement.

Lachlan McKnight

Next Steps

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