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Guarantees
Bankers'
Securities
What is a Guarantee?
Attributes of Guarantees as Security
Types of guarantee
General Considerations
Guarantee by a wife or elderly relative
Principal debtor obtaining the guarantee
Guarantee by a customer
Guarantees given by women
Misrepresentation, misapprehension, disclosure of information and mistake
Value and enforceability of the guarantee
Taking the Security (Member
section)
Guarantees by partners (Member
section)
Guarantees by limited companies (Member
section)
Consumer Credit Act guarantees (Member
section)
Monitoring the Security (Member
section)
Standard Clauses in a Bank Guarantee (Member
section)
Request for Information by the Guarantor (Member
section)
Action against co-guarantors (Member
section)
Determination of a Guarantee (Member
section)
Standby Credits and Bank Guarantees (Member
section)
Bankers'
Securities
What is a Guarantee?
A guarantee is a promise to answer 'for the debt, default or miscarriage
of another', if that person fails to meet the obligation: Statute
of Frauds 1677, s.4. Primary liability for the debt is incurred by the
principal debtor. The guarantor incurs secondary liability, that
is, the guarantor becomes liable only if the principal debtor fails to
pay. If the principal debtor's liability to the bank is void, the
guarantor will not be liable: Associated Japanese Bank (International)
Ltd v Crédit du Nord SA [1988].
A guarantee must be evidenced by a written
note or memorandum signed by the guarantors or their agent. Without
such written evidence, a guarantee is unenforceable. Bank guarantees
are, of course, always written contracts.
In these two respects, a guarantee differs
from an indemnity. An indemnity imposes direct or primary liability
to pay and need not be evidenced in writing: Mountstephen v Lakeman
[1871].
Bank guarantee forms are, in fact, dual purpose
documents. They operate as guarantees where the borrowing is enforceable
against the principal debtor - the guarantor by definition incurring secondary
liability - but as indemnities where it is not.
Attributes
of Guarantees as Security
Advantages
An unsupported guarantee is a very simple security to take - no registration
is involved and no complications concerning proof of title arise.
A guarantee can easily and immediately be enforced by court action.
As with any other security given by a third party (collateral security),
it can be ignored when claiming against the principal debtor.
As several parties can guarantee a loan, it is useful security where the
principal debtor is unable to provide security but offers a viable business
loan proposition.
Disadvantages
Unless supported by a cash deposit or other security, a guarantee
is always of an uncertain value as a security. A guarantor's financial
position can change very quickly. An unsupported guarantee should
only be accepted after careful investigation into the proposed guarantor's
financial circumstances.
Court action may be necessary to realise the security and a technicality
may defeat the bank's claim. For example, special rules apply to
guarantees taken from partnerships and companies. A defeat of the
ban's claim on a legal technicality would almost certainly be the result
of carelessness when taking the security.
Enforcing a guarantee may cause bad feeling, particularly if the guarantor
is a valued customer.
Litigation may be necessary to enforce payment where the guarantee was
not supported by other (realisable) security.
We provide more information in
our Member Area. Subscribe
as Member
Recommended further reading:
Bonds
Bankers
Acceptance
Commercial
Paper
Discounting of bank
guarantees (BG's)
(Redeeming for cash or raising a credit line)
Introduction
to Institutional Trading
Introduction to Bank
Debenture Trading Programs
Zero Coupons and STRIPS
Terms
of use
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