Legal Tip 26: Always ask for a guarantee but never give one

Discussion in 'Legal Issues' started by Terry_w, 14th Jul, 2015.

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    18th Jun, 2015
    Always ask for a personal guarantee but never give one

    You should avoid giving guarantees as much as possible. Giving a guarantee for a company or a family member or even a stranger will mean you are exposing yourself. If the other person doesn't pay or defaults on the contract the person giving the guarantee will be liable. This will mean your personal assets are at risk.

    This is especially important where there are multiple people involved in a company. Often when entering a lease or a loan all directors and sometimes even shareholders will be asked to give a guarantee. You should refuse where possible, but usually without a guarantee you will find the other party will not contract with you.

    Limit the guarantees by structuring the company in a certain way. This may involve reducing the number of directors. Certainly keep spouses off as a director as there is no point in both of you going down if the company if it all fails.

    Conversely when you are on the other side of the transaction you should always ask for a guarantee. For example if you are leasing premises to a company if things go bad the company is likely to be worth just $2 and you will lose out. So you could ask for guarantees from all directors - even then they may not have any assets which you could chase. Try and get guarantees from their spouses where possible.

    You would also want to limit guarantees from a serviceability perspective especially guarantees with loans. Most lenders will treat a person who has guaranteed a loan the same as if they had taken that loan out in their own name. They will be liable for the loan if the borrower cannot pay so the lender needs to make sure they can afford to pay this loan on top of their other income.
    SK Investments, wombat777 and aussieB like this.