A guarantor is a person (or company/trustee of a trust) who gives a written undertaking to answer for the payment of a debt or performance of an obligation by another person liable in the first instance.
In New Zealand, a personal guarantee can be a valuable tool in recovering outstanding money. So let's say you've given a personal guarantee, or perhaps someone is asking you to provide a personal guarantee?
Personal guarantees are a serious matter. They can be complex, and may tip you into unanticipated bankruptcy. The stresses associated with the threat of bankruptcy can lead to a personal family cost that is just too high and too painful to pay - perhaps you not only lose your home and favourite Audi, but your partner too.
And if you are a creditor who believes they have an effective personal guarantee in place - think again.
You might like to get a health check performed on that guarantee, to avoid nasty surprises downstream!
You may be surprised to learn that unless a demand upon the principal debtor is required by the contract of guarantee you have signed, it is not necessary for the creditor to require payment from the principal debtor before proceeding against YOU as the guarantor. Nor is it necessary to sue a solvent principal debtor before proceeding against YOU as the guarantor.
Status of the guarantor
If you supply goods or services to a company on credit, it is advisable to require the Directors of that company to provide you with a personal guarantee. But is that signature going to stand up in court? The precise form of the signature and any annotations associated with it, along with the construction of the contract of guarantee, are critical. In some circumstances, the personal guarantee may be unenforceable.
If you're a creditor, you need to run your guarantee past us. If you are a guarantor, the same applies.
Change of status of principal debtor
A guarantee which by its terms applies only to the debts of a named individual will not usually be construed to secure debts incurred after that individual enters into a partnership.Where the principal debtor is a partnership, a continuing guarantee is revoked as to future transactions by any change in the constitution of the partnership, in the absence of agreement to the contrary.
A guarantee for the debts of a named individual or partnership will not usually secure debts incurred by a company to which that business is transferred, even if the company is owned and controlled by the original principal debtor, because the company is a separate legal entity.
Nor will a guarantee for the debts of one company normally be construed so as to extend to cover the debts of its parent, subsidiary, or sister companies to which its business is transferred on a reconstruction or amalgamation. However, such liabilities may be covered where it is clear that is what the parties intended.
However, changes in the directors or shareholders of a creditor company will not generally end a continuing guarantee.
Change of creditor's status
Unless the parties have agreed otherwise, any change in the identity of the creditor terminates the liability of a guarantor under a continuing guarantee in respect of future transactions.
For example, where the creditor is a partnership, a continuing guarantee is revoked as to future transactions by any change in the constitution of the partnership, unless there is agreement to the contrary.
Similarly, where a society to which a guarantee is given is subsequently registered as an incorporated society, that registration will generally terminate your liability as guarantor as to future transactions.
It is open to the parties to alter the position by agreement. So a guarantee expressed to be in favour of a bank, its successors and assignees, and any company with which it may amalgamate will cover advances made by a successor bank with which it has amalgamated and to which its assets and undertakings have been transferred.
Be especially careful regarding the signature on a personal guarantee. If you are requiring an individual to provide a personal guarantee for credit offered to a company, for instance, if that person signs the personal guarantee with their name, and then the qualifier 'as Director', this may no longer be a personal guarantee!
Remember a personal guarantee can be a ticking time bomb for both a creditor and a debtor.
Finally, remember that that personal guarantee may be worth a small fortune one day. Keep that document in a safe place, or even better yet - lodge it with us for safekeeping once we have completed our 'health check' on the document!