Co-signing a loan

Co-Signing: Bank Guarantees & Loans

Question: I have been asked by my daughter and son—in-law to sign a personal guarantee for their bank to support a business loan. I am nervous. I am not an experienced business person. What should I do?

Answer: Business people operating small businesses that need financing are often asked by their bank to supply not only their personal guarantee but guarantees from other family members who may have more assets available to secure the loan. However in many cases, woebegone the family member who gave their guarantee!

Bank guarantees are surprisingly complicated documents to read. They are designed to deny the guarantor any defence against a demand by the bank for payment on the guarantee. They are nasty instruments.

Banks have been known to obtain personal guarantees from people to support a business loan that has become problematic for them and then, once having the additional security, call upon the guarantor for payment!

“Never a lender or borrower be — but above all —— never guarantee.”

Banks also had allowed borrowers to take on additional debt that was not in place at the time the guarantee was signed and was not even considered by the guarantor when they signed the guarantee. Nonetheless, at a later date, the bank will look to the guarantor for payment of the additional debt because the guarantee covered both present and future debts of the borrower.

In requiring a personal guarantee, the bank is passing a risk onto the guarantor for the loan that it does not want to accept. Ask yourselfi ‘If the risk of the loan is too high for the bank, is it not too high for me?’

It is tough to escape liability once you have signed a guarantee. While the Courts had been sympathetic to unsophisticated guarantors or those misled by the lender when they signed the guarantee, they generally enforce guarantees as they do any other contract.

The banks have been careful in most instances to ensure that guarantors receive “independent legal advice”, (ILA). ILA appears intended to make sure that the guarantor has reviewed the guarantee with their own lawyer and that the guarantor is not being forced by threat or other coercion to sign it. Having had ILA, the guarantor cannot successfully defend against a claim by the bank by arguing that they were forced to sign the guarantee by some threat or that they did not understand the guarantee. ILA is as much for the benefit of the bank as for the benefit of the guarantor. However, ILA is not a prerequisite to the guarantee being enforced against the guarantor. The Courts have enforced guarantees even where the guarantor did not receive ILA before signing the document.

As a general rule, it is unwise to become personally liable for the debts of another person – even as a family member. Each situation, however, is dependent upon”‘its own facts. If you are prepared to give your personal guarantee, you should know the amount and all the terms and conditions of the loan, the purpose of the loan, what other security the lender may have and whether you will be supplied in timely fashion by the bank with information about the borrower and their ongoing business dealings with the bank. You should thoroughly review your daughter and son-in-law’s business with your own accountant and lawyer so that appropriate written agreements can be made between yourself, them and their banker to limit and control any risk that you decide to assume.

Disclaimer:

The preceding is not legal advice and is not to be relied upon by the reader for any purpose. Readers are advised to seek legal advice from their own lawyer for any specific legal questions. Neither the author nor the publisher accepts any responsibility for reliance placed by the reader on the contents of this article and no representation or warranty is given as to accuracy or completeness.