In some cases, lenders call for independent third parties (also known as guarantors) to provide a guarantee to satisfy the loan agreement obligations of a borrower. This guarantee is usually documented in the ‘guarantee and indemnity’ documents, which is typically drafted to be the benefit of the lender. The guarantee and indemnity document stipulates that, should the borrower fail to meet its loan obligations, the lender may ask that the guarantor perform these obligations on behalf of the borrower. A guarantee and indemnity is a higher priority for a lender in situations where the borrower is considered to be a high credit risk. As the lender, you ideally want assurance from a guarantor whose credit risk is low to reduce the likelihood of not being repaid under the loan agreement.
What to look for in a guarantee
If a lender requests a guarantee and indemnity from you, there are certain things you should be aware of:
- Who is the borrower in this case? Do they have a high credit risk (i.e. is it probable that there will be a default under the terms of loan agreement)? To work out the level of risk attached to the borrower, you could request from them certain financial information. For example, what’s in their asset pool? What is their income? What are their debts? Have they any history of bankruptcy?
- Who is the guarantor? You need to consider whether you are the sole guarantor or whether there are multiple guarantors. If there are multiple guarantors, are they jointly, severally or jointly and severally liable? If the guarantors are severally or jointly and severally liable, then the lender could bring a claim against you (to the exclusion of the other guarantors) for the full amount owing. If the guarantors are jointly liable, then the lender would have to bring a claim against all guarantors for the amount due.
- What precisely will you be the guarantor for? You need to determine what exactly you agree to guarantee. In most cases, you are not guaranteeing a set amount or merely the principal loan. Rather, you will be expected to guarantee “all amounts payable”, which encompasses the principal amount, any interest, fees and costs, as well as additional expenditures such as legal and indemnity payments. Also, a guarantor might be expected to guarantee all other duties under the loan agreement. For instance, a borrower’s failure to secure a non-payment obligation under the loan agreement, such as giving the lender particular information, will mean that the guarantor will bear the responsibility for providing that information. The loan agreement may also be a secured agreement, in which case you would have to guarantee any obligations under the security documents. To establish the scope of the guarantee, you must review the guarantee and indemnity you are signing, as well as the loan agreement and any other underlying documents.
- Do you have any other obligations under the guarantee? You may have other obligations under the guarantee (for example the provision of information to the lender). If these appear to be harsh or unreasonable, then you should try to negotiate the removal or amendment of them. If they are not removed, you must ensure that you comply with these obligations. If you do not, the lender could bring a claim against you for breach of contract.
- Are you being asked to make any representations and warranties under the guarantee? You may be asked to make certain representations and warranties under the guarantee. If this is the case, you must ensure the representations and warranties are true and correct. If they are not, you should ask that they are deleted or amended before you sign the guarantee. Otherwise, the lender could bring a claim against you for misrepresentation.
Don’t guarantee a loan until you have assessed the level of risk. Without making a proper risk assessment, you will
If you have been asked to provide a guarantee and would like some advice on the risks involved, or you would like us to review a guarantee and any underlying documents to determine exactly what you are being asked to guarantee, please get in touch with one of our specialised lawyers who would be delighted to assist.