Going Guarantor? Six questions to ask before you sign to
be a guarantor
It is now a common requirement of lenders that a guarantor
receive independent legal advice on guarantee documents. The banks
require a solicitor to sign a Legal Advice Certificate confirming
the advice given. This certificate can form part of the guarantee
or may be a separate document.
Before you agree to go guarantor it is important to remember
that as guarantor you will be stepping into the shoes of the
borrower in the event they are unable to satisfy the terms of the
contract with the lender. Below are some questions that you may
want to ask before you agree to be a guarantor:
What is a Guarantee?
A guarantee is a promise by the guarantor to assume the debt
obligation of a borrower if that borrower defaults under the terms
of the loan contract.
Limited vs Unlimited guarantees?
A guarantee can be limited or unlimited in amount, meaning as a
guarantor you can be liable for only a portion or all of the debt.
You should discuss the type of guarantee you are capable of
providing with the borrower.
What is an Indemnity?
An indemnity is obligation (that is usually in addition to the
guarantee) where you are responsible for the losses incurred by the
borrower. If the borrower defaults, the indemnity gives the lender
the right to shift the loss it incurs onto you.
How do I know the Borrower can afford the Loan that I
You will need to satisfy yourself that the borrower is able to
meet the terms and conditions of the loan, including whether or not
they have the ability to meet the required repayments. It may be
that in addition to obtaining independent legal advice you also
need independent financial advice (even if it is not a condition of
the loan). To this extent HHG Legal Group can assist and refer you
to accredited financial advisors.
Will I receive notice if the Borrower is in default
under the loan?
Depending on the terms of the loan agreement, as guarantor you may
not be entitled to notice of the borrower's default.
Does the Bank have to take enforcement against the
borrower first to recover the debt before taking legal action
against me as guarantor?
NO. Generally, as a guarantor you will have no right to insist
that the lender proceeds first against the borrower or enforce
against the borrower's securities before enforcing the
guarantee. This means that in the event the borrower defaults, your
assets can be sold by the bank to repay the loan under the
This certificate of independent legal advice essentially
provides the bank with assurance that the Guarantee document has
been executed by the guarantor willingly after having received
independent legal advice on the full force and effect of the
document. The legal advice guarantors receive prior to signing can
be the most important piece of advice they ever receive.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).