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Guarantor in economic hardship: What can you do if the borrower can’t repay?

A guarantor is a third party who agrees to repay sums due under a loan, mortgage, rental agreement, overdraft or other form of agreement where one party, the borrower, owes money to another, the lender. You may have agreed to be a guarantor to a friend, family member or business associate or as a director of your own company, have agreed to guarantee the obligations of your company or your company may have agreed to be a guarantor to another company.

A guarantee can last for the life of the underlying agreement between borrower and lender and therefore as a guarantor, your obligations may last for a long time. At the time of granting the guarantee you may have been confident in the borrower’s ability to repay. Circumstances change, however, including general trading and economic conditions.

What can you do, as a guarantor, in times of economic difficulty, when you fear that the borrower will not be able to repay monies due to the lender? Our corporate law solicitors discuss your options below.

Can you step out of your guarantee?

The first check to make is whether you can ‘step out’ or terminate your obligation as guarantor. This will either be written into your guarantee or will be implied by law, due to the type of guarantee that you have given. If there is no express right to terminate, then please contact our corporate solicitors to discuss whether there might be an implied termination right.

It is important to realise that even if you have an express right to terminate your guarantee:

  • this right to terminate will be dependent on certain conditions being met;
  • termination is generally effective by giving notice and it is critical to follow the notice provisions exactly;
  • termination will only impact obligations or debt incurred by the borrower after the notice has been given and notice period has expired. This means that you will remain liable to the lender for any debt incurred by the borrower before you served your termination notice.

If you cannot step out of your guarantee, what else can you do?

In the event that you are not able to terminate your guarantee then the most obvious practical step that you can take is to ensure repayment of the underlying debt as this is the only sure fire way for the lender to release your guarantee. 

Therefore it is important that you encourage the borrower to consider all repayment methods, including entering into a company voluntary arrangement or other form of arrangement with the lender, where repayments are varied so that the borrower can stay in business. This is particularly pertinent where you are guarantor for the repayments of your own company.

What happens if the borrower is unable to repay the debt to the lender and the lender enforces your guarantee?

The lender is not obliged to exhaust other remedies against the borrower or enforce any other securities, before enforcing your guarantee and seeking payment from you. However, if the lender does this, then you should be entitled, through the doctrine of subrogation, to step into the lender’s shoes in relation to any security in place for the guaranteed debt. This will allow you to seek to reclaim your repayments through that security;

You can argue that the lender’s rights under the guarantee have not yet or properly arisen. This will depend on the wording of the guarantee and all the facts and circumstances and legal advice should be sought.

Depending on the circumstances, you may be able to argue that the guarantee has been released by variation, breach or release of other security or that you entered into it through duress, undue influence or failure to disclose unusual circumstances. Again, this depends on the facts and circumstances and legal advice should always be sought.

You step into the borrower’s shoes in terms of the claims that the borrower might have had against the lender, such as that the debt is not due or that there has been an improper release of security. Again, legal advice should be sought before making these claims.

Repayment schedules

From a practical perspective, you can seek to agree a repayment schedule with the lender that you can afford. You retain your rights to seek repayment of any sums you pay to the lender from the borrower.

In times of economic difficulty and where you know that you have given guarantees, it is important to understand your liability under those guarantees, the ability of the borrower to repay, your own ability to repay and the options available to you, in the event that the lender calls on you, as guarantor. Our corporate law solicitors can assist you in understanding your position. Please call is on 0800 689 1700 or fill out the short enquiry form below and a member of our team will be in contact.

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