The longest serving Chief Justice of the High Court of Australia from 1964 to 1981 was declared bankrupt after guaranteeing a loan for a relative. Don’t make the same mistake the Chief Justice did! Understanding your rights as a guarantor is important – don’t enter a potentially risky transaction if you do not fully understand the circumstances. The fact that a guarantee is required by a credit provider should warn you that the debtor is considered a credit risk.

A personal guarantee is a promise made by a guarantor that they will meet the debtor’s obligations if the debtor fails to perform its obligations under a contract. The guarantee is between the guarantor and the credit provider. Credit providers often request guarantees when they are concerned that a debtor poses a credit risk. Most personal guarantees are regulated by the National Consumer Credit Protection Act 2009 and the National Credit Code, Schedule 1 of the NCCP Act, and the National Consumer Credit Protection Regulations 2010 (Cth). Guarantees are usually demanded by credit providers when entering into a loan, insurance policy, supply or service agreement or lease.

What’s in a Guarantee?

Under the National Credit Code, a guarantee must be in the prescribed form as required, including being in writing and signed by the guarantor. Generally, a guarantee can only secure an amount equal to the debtor’s liability under the credit contract, that is, the debt plus interest and enforcement costs.

Furthermore, the prospective guarantor must receive an information statement and a copy of the credit contract. The information statement sets out what is a guarantee, the amount being borrowed, credit charges, and the rights and obligations of a guarantor. These documents must be provided by the credit provider to the guarantor within 14 days after the guarantee has been signed.

Exercise of a Guarantee

In the unfortunate circumstance a debtor fails to honour a credit contract, the credit provider may exercise the guarantee. This means the credit provider may enforce a judgment against the guarantor. If a guarantor is unable to pay the amount owed, a credit provider can seize goods and sell assets. A credit provider may also commence court proceedings, and apply for a garnishee order to deduct money from a nominated bank account. Credit providers may also issue a bankruptcy notice against you or appoint a receiver to manage all your finances and assets. If you have signed the guarantee, it is unlikely you can avoid liability so it is important to have a specialist leasing lawyer look over your guarantee!

Unjust Guarantees

A guarantee can be deemed unjust, where guarantors can have a guarantee set aside. In summary, vulnerable individuals must not be placed in situations of high-risk borrowing. This has been established in a number of Australian cases. Predominantly, Commercial Bank of Australia Ltd v Amadio [1983] HCA 14 and Garcia v National Australia Bank [1998] HCA 48.

Conclusion

We highly recommend that a guarantor seeks legal advice before entering into a personal guarantee. Personal inquiries should also be undertaken in determining the credit worthiness, financial position and honesty of the debtor. Our lawyers specialise in loans, personal finance and lending. Contact us today on 1300 544 755 or use the contact form on this page. If you have received a debt demand, our lawyers can also provide you with legal advice regarding the options available to you.

Anthony Lieu

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