Do you intend to become a guarantor? Are you considering asking a party to guarantee debts owed to you, whether for business or personal reasons? In these situations, there are many factors to take into account and knowing your rights and the protection available to you could make the world of difference.
This article will explore considerations which may be relevant in helping you to decide whether to take on such a liability and if so, how the guarantee should be structured.
What is a Guarantee?
A guarantee is a form of undertaking by a person, called a surety, to another person, called a creditor, in relation to the debts of a third person called the debtor. It is basically a contractual obligation that captures the surety’s promise to pay the creditor if the debtor fails to do so.
Guarantees are often confused with indemnities. The difference is that guarantees are secondary obligations. In other words, the debtor must first be liable for the surety to be liable. Ifthe creditor discharges the debtor, the surety is also discharged. In contrast, a person who gave an indemnity to hold a creditor harmless is liable to do so regardless.
A corollary to this, is that by executing the guarantee, a surety agrees to take on the liability of the debtor. Since guarantees are typically drafted such that the surety and debtor are both jointly and severally liable, a surety must be prepared that the creditor may seek repayment from him without first resorting to seeking repayment from the debtor.
A guarantee can also be marked as “joint and severable”. This typically occurs where there is more than one surety. Each surety is jointly liable together with the rest of the sureties as well as individually liable to the creditor for full repayment of the debtor’s debt. Similarly, the creditor can seek repayment without first resorting to seeking repayment from the debtor and additionally, can seek repayment from one or all of the sureties.
A guarantee is typically sought by a creditor who wants more security or assurance that the debts owed by the debtor will be paid. For example, if the debtor is a private limited company who seeks to borrow money, a bank will typically ask for a real person to be a guarantor, typically a director or the majority shareholder of the company, so that these persons would not be able to use the company’s status as a separate legal personality as a shield.
Formality Requirements
Since guarantees are basically contracts, they must be supported by consideration. Alternatively, the guarantee can be executed under seal as a deed.
It should also be noted that section 6(b) of the Civil Law Act 1909 applies to guarantees – a guarantee must be in writing and signed by the surety or his representative. This means that an oral guarantee is unenforceable.
When am I Discharged under a Guarantee?
A surety may be discharged for a wide number of reasons.
First and the most common, a surety may be discharged if the debtor performs his obligation, such as by making payment to the creditor.
Sometimes, a creditor may himself discharge the surety. For example, a creditor may vary the terms of the guarantee, turning it into something which the surety did not agree to. Creditors may at times also give the debtor additional time to pay and this also discharges the surety.
Lastly, a surety may be discharged if the guarantee is voided. A guarantee is voidable due to vitiating factors such as unconscionability, illegality, misrepresentation or undue influence. If such factors were present when the surety was coerced into executing the guarantee, then the surety can choose to void the guarantee.
What would happen to me as a surety if the Creditor sues me?
In circumstances where there is no dispute that the surety is liable under the Guarantee, a creditor may send a statutory demand and make a bankruptcy application if the debt is more than $15,000. If you are unable to pay and are made a bankrupt, it would have cascading consequences such as affecting your ability to leave Singapore, be a director of a company, ability to take loans or make purchases and even cause you to be in breach of various contracts you may have already entered into, such as banking or credit facilities.
In other circumstances where the surety disputes his liability, a creditor may first need to file a claim against the surety. A judgment against the surety would need to be obtained, following which the creditor would have the choice of taking up enforcement proceedings if the creditor is aware that the surety has assets to enforce against, or apply for examination of judgment respondent proceedings to find out what assets the surety has.
A surety who has been sued by a creditor can in turn sue the debtor. However, as covered above, there may be many good reasons why the creditor had decided to pursue the surety instead of the debtor and these may also constitute good reasons why pursuing the debtor would not be fruitful.
Conclusion
If you are entering into a guarantee whether as surety, creditor or debtor, our team is here to provide the expertise and support needed to navigate this difficult time and help you secure the protection you deserve.
This publication is not intended to be, nor should it be taken as, legal advice. It is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking any action(s) based on this publication. We shall not be responsible for, nor do we accept any responsibility for, any loss or damage that may arise from any reliance on this publication.
