Being A Guarantor, Avoiding Liability & The Dangers

Sunday, 8. April 2012

Back in July 2009 I posted the following on my blog, under the heading of ‘If you have guaranteed a debt you may be able to avoid payment’. I’ve repeated the blog below as I believe it is worth showing again, given the current economic climate but also I have uncovered something else that may be a little worrying if you have guaranteed a debt and the person you’ve guaranteed has defaulted. Here’s the original post:- In the current climate there is lots of talk about guarantees and indemnities. Let’s be clear, before a lender considers a guarantor he must be fairly certain that the borrower can repay his debts.

You may be someone who has never had credit before or you have had a credit card that has hardly been used, so you have very little credit history on which to form an opinion.

But everything about you looks good, home, job, bank etc and you certainly have no adverse information stored on your credit file but for that extra bit of comfort the lender may be happy to accept a guarantor.

The hope is that the guarantor will never be called upon but in the current climate more and more individuals and businesses are failing or struggling so it isn’t surprising that fewer lenders are accepting guarantees, they would rather the customer was rock solid in the first place, especially as the lenders appear to have less money to lend than they have applicants in the first place.

Of course the bad news is that when people have failed to make their payments, where a guarantor is involved, the finance company approaches them to make good the missed payments, which could of course run into thousands of pounds and if the guarantor is unable or unwilling to make the payments he could also find himself in court and with adverse information stored against him on the credit files, making it difficult for him to arrange credit in the future – so beware.

However, this snippet of information could save you from all of this if you have signed a guarantee, avoid making any payments and leave your credit unaffected. Much of what I’m about to talk about is in the wording of the guarantee/indemnity.

First of all what is the difference between a guarantee and an indemnity? A guarantee is your promise to answer for the debt of another who still remains the one who is primarily liable for the debt.

The liability of the guarantor is in fact secondary. On the other hand, if you provide an indemnity it means that you, known as the surety, share primary responsibility with the borrower.

In other words it is a little like being jointly and severally liable for a debt, eg. a mortgage in joint names. Now this is where it can get interesting. Lets say you have signed up as a guarantor on a debt taken on by a friend or relation.

The borrower has fallen behind with repayments and the lender has tried to collect the money without success making you now liable for the debt. In a final effort to recover money from the borrower the lender agrees a payment schedule, ie reduced payments for 3 months then increased payments to bring the debt back into line.

This is not the agreement that you agreed to guarantee so unless there was a term in the guarantee that allowed for a variation or time to pay without discharging the surety you are no longer a guarantor. If you signed an indemnity then you are considered to be jointly liable and as responsible for the debt as the primary borrower.

In summary, in the absence of an express term to the contrary in the guarantee, any bilateral variation of the contract between the creditor and the debtor, ie by allowing more time to pay, will discharge the liability of the guarantor. This is not the case with an indemnity where the liability of the surety, being a primary liability, survives.

This was highlighted in the case of Associated British Ports v Ferryways NV and MSC Belgium NV whereby MSC guaranteed the contractual obligations to Associated British Ports.

When Ferryways were given more time to pay, following a dispute, the courts ruled (and confirmed on appeal) that this variation discharged the obligations of the guarantor.

Had the guarantee provided that any subsequent variation or time to pay agreement between the claimant and Ferryways would not discharge the surety, the result would have been different. So check the wording of a guarantee before you sign it and know your obligations.

That was what I said and it remains true today. However, in a landmark case McGuiness vs Norwich & Peterborough Building Society, following appeal it was ruled that the lender does not have to exhaust all avenues to recover the debt from the primary borrower before issuing bankruptcy proceedings against the guarantor.

It’s very much down to the wording of the guarantee so you can’t assume anything. Most people believe that they will only become liable for the debt once the lender has tried every method available to him but in this guarantee the guarantor became a joint debtor which meant in essence that they were equally liable for the sum owed plus interest.

So when you are asked to sign a guarantee on behalf of a friend or relation be very careful, far too often I’ve heard brokers and dealers say to a potential guarantor, don’t worry about signing the guarantee, it’s not worth the paper it’s written on! Yeah right! By Graham Hill