What is a Guarantee?
The execution of guarantee documentation by an individual, connects that individual to a loan agreement entered into by another party (borrower). Giving a guarantee allows a lender (ie. a bank) to place the guarantor “in the shoes” of a borrower if that borrower does not fulfil their obligations under a loan agreement. This allows the lender to pursue payment from a guarantor and the ability to take enforcement action to recover money outstanding under the loan agreement.
Why does my Bank require me to receive Independent Legal Advice?
Guarantees create serious obligations, with far reaching legal implications for potential guarantors. Following precedents such as the Amadio case (Commercial Bank of Australia v Amadio (1983) 151 CLR 447), banks have become increasingly more cautious about their lending practices to ensure that there are safety nets in place to reduce the risk of defaulting borrowers.
As a result, many banks and private lenders require guarantors to obtain independent legal advice from solicitors and financial advisers to confirm that they have been given the opportunity to understand and be fully informed about what they are executing and the potential liabilities that can arise if the borrower defaults.
When is a Guarantee usually required?
Lenders will usually require a personal guarantee to be given where the borrower is a company or a trust. Usually the individual directors and/or shareholders are required to provide a personal guarantee for the debt. Other related entities may also be required to provide corporate guarantees.
Guarantees can also be required where the borrower does not have sufficient equity in their property to secure the loan. A related person such as their parents, will provide a guarantee for the debt. In these circumstances the guarantors will also be required to offer additional assets as security for the debt (which is usually real estate).
Can my Solicitor give me Financial Advice?
A Solicitor cannot give financial advice, for example, if a particular bank, loan, credit card or other lending facility is the correct lender or product for you. We strongly suggest in addition to independent legal advice also obtaining independent financial advice from your preferred financial advisor or accountant prior to entering into a guarantee.
Prior to your attending our office to sign a guarantee and obtain independent legal advice, we will ask that you provide us with a copy of the loan documentation and guarantee so that it can be reviewed and price for our advice can be given to you. We also recommend that you read all documentation prior to your appointment so that you can be prepared with any questions you may have.
When attending your appointment you need to bring with you:
- All original documents provided by the financial institution, including the loan facility agreement and guarantee documentation; and
- 100 points of identification (for example a combination of two – passport, driver’s licence, Medicare card and birth certificate).
For further information or to make an appointment to obtain independent legal advice about a guarantee, please contact us on (02) 6280 8899 or email: firstname.lastname@example.org.