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The following are some matters that a person should bear in mind when being asked to provide a personal guarantee for a loan or credit to be provided to a company or another person or legal entity. These matters essentially go to a balancing of risk against the benefits that may be available from such an arrangement. There are also some very important considerations that should apply to all situations where a guarantee is being contemplated:

  • A guarantee can take the place of a security over a business asset or some other encumbrance;
  • Often, if a business is obtaining a loan from a bank or a financial institution, that lender may require that the directors enter into a personal guarantee for the money. This means that if the company cannot service the debt repayments, the institution can call on the guarantors to settle the account personally;
  • The guarantor has the burden of the guarantee which means that the guarantor is liable for the debt up until the lending institution has its debts repaid in full;
  • A guarantor may terminate his guarantee with the lending institution, however this may give rise to the immediate liability for the whole debt to be repaid. If the party whose loan is guaranteed cannot repay the outstanding amount, the guarantor will be liable for it; and
  • Guarantees are often on a “full indemnity basis” which means that the loan institution will have to prove the debt before taking any action against the guarantor.

For these reasons, if you are considering providing a personal guarantee, all other options must be explored before giving a guarantee to any lending institution. Another option may include offering property or an asset as security for the loan. It is strongly advisable to ensure that a guarantee is capped at a specific amount, so as to avoid creating a liability under an “all monies guarantee”.

It is important to have all matters pertaining to the guarantee, such as its terms and conditions as well its discharge, to be in writing. This is so that there is no uncertainty about the status of the guarantee and the liability of the parties to the agreement. Because of the serious nature of a personal guarantee, independent legal advice should always be sought before entering in any such agreements.

If you are wanting to seek legal advice about providing a personal guarantee, Navado Lawyers & Solicitors can assist by properly assessing and considering all of the circumstances and the factual matrix, before providing you with specific legal advice. You should of course obtain a copy of any proposed written personal guarantee, so that you might provide this to our office, for the purposes of obtaining legal advice. 

If you need legal assistance in relation to a personal guarantee matter, you may wish to speak to a Bankruptcy & Insolvency Solicitor at Navado Lawyers & Solicitors. To make an appointment, please contact us by telephone on (02) 9233 4048 or email to info@navado.com.au.

                                                                                                                                        

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