Guarantor Beware!

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Have you ever been asked to be a guarantor? Do you have children may be a more telling question in this scenario. Many people do “go guarantor” for their children or family members and this is often an effective way to enable the child or family members (borrower) to purchase a home without the need for expensive mortgage insurance. In addition, if you run a business under a company entity, as the director you will invariably be obliged to guarantee any company borrowings, and the lease of the premises.

However, if the borrower falls into difficulty, you must be very careful as to how you, as guarantor, provide assistance.

In one situation, an example of what not to do, a company borrowed funds from a financier and the guarantor guaranteed this loan. The company also borrowed money from a second lender.

Trouble struck the company and the guarantor provided its own funds to the company to allow the completion of a construction project to go ahead. Things didn’t go so well and the first lender appointed receivers. The company’s assets were sold and the first lender got all its money back.

The guarantor argued that as it had provided funds to the company it stood next in line (that is, it should stand in the position of first lender) for the surplus funds. However, the court held that the second financier was entitled to the surplus funds as the guarantor, strictly speaking, did not hand over funds under the actual guarantee. The guarantor had provided financial assistance to the company, but not pursuant to the terms of the guarantee.

Lesson?  If you are guarantor and elect to assist the borrower if difficulties arise, make sure that you do so strictly in accordance with the guarantee and don’t simply hand over funds directly to the borrower without the financier being aware that these funds are for payment of the obligations under the loan.

Need assistance with questions regarding guarantor’s obligations? Don’t hesitate to contact MMLaw.

 

The information in this document represents general information and should not be relied on for your specific circumstances. If you require legal advice and assistance on the matters contained or associated in this document you should contact MMLaw.

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Disclaimer

The content published in this Blog is in the form of academic papers and the opinions expressed herein are generalised. The information provided is for educational purposes, not specific legal advice.

The application of any principles referred to can alter from case to case and accordingly you should seek independent legal advice in respect of your individual circumstances.

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