Have you ever been asked to guarantee someone’s loan?

  • Parents often provide guarantees to a bank when their adult child applies for a loan.
  • Company directors give personal guarantees to meet obligations to financiers or suppliers.

Guarantees usually have clauses like:

“You guarantee that the customer will pay to Bank all the amounts which the customer owes the Bank at anytime. If the customer does not pay an amount when due, you agree to pay that amount to the Bank when the Bank demands it.”

This means, if the customer defaults, you along with all your assets, will stand in the shoes of the defaulter.

You will have to repay the loan plus onerous additional charges such as default fees, bank fees, legal costs and penalty interest.

In these circumstances parents have been consequently forced out of their home in their retirement years.

More than one guarantor?

When there is more than one guarantor, each guarantor has an obligation to share the repayment of the debt. They have the right to each make a contribution towards payment of the primary debt.

This means if a co-guarantor of yours pays out the loan or makes a disproportionately higher repayment of the debt, he or she has the right to seek contribution from you and any other guarantors.

For example, where there are two guarantors, if the first co-guarantor pays off 70% of the loan whilst the second co-guarantor pays 30%, the first co-guarantor has the right to seek 20% of the loan from the second co-guarantor. The law will generally put the common guarantors in an equal and proportionate position. This can apply even in circumstances where the co-guarantors were unaware of each other.

What if the bank lets you off?

The High Court recently considered this situation*. A creditor bank and one of the guarantors agreed not to sue for payment of the guaranteed debt.

The Court said the agreement does not release all the guarantors from the guarantee. All co-guarantors continued to share liabilities under the guarantee. The guarantors who paid more than their proportionate share of the guaranteed debt were entitled to recover contribution from the other co-guarantors.

* Lavin v Toppi [2015] HCA 4 (11 February 2015).

Always be cautious if you are asked to guarantee another person’s financial arrangements.

You should seek legal advice when becoming a guarantor or if you have had a guarantee you have made called upon by a financial institution.