When asked to sign a deed of guarantee and indemnity it is important to consider what is a guarantee and indemnity before signing. It is becoming increasingly common for lenders to require a guarantee and indemnity from either a third party company or individual in respect of a commercial loan made to a business. Because this tends to create a personal liability along-side the corporate liability of the borrower it is important that you understand both the terms and the implications of signing a guarantee and indemnity.
A deed of guarantee and indemnity can take many forms but in essence, the document will contain guarantee provisions and indemnity provisions:
What is a guarantee?
In entering into a guarantee in the commercial finance context, one is assuring the lender that the obligations under the loan agreement will be met. If the borrower fails to meet an obligation (for example, making a payment, the guarantor may be required to step into the borrower’s shoes to meet the obligation.
- the lender must seek payment from the borrower first but if the borrower does not pay then the lender can seek payment from the guarantor. The risk for the guarantor is that if the company does not pay or cannot pay in full then the guarantor’s assets are at risk for the lender to seek repayment from the guarantor;
- sometimes the lender or commercial finance provider will agree to limit the liability of the guarantor in the guarantee. When considering whether to provide a guarantee and indemnity, it is essential to consider.
What is an indemnity?
In providing an indemnity in the commercial finance context, one is assuring the lender that they will compensate the lender for any loss suffered due to an action or inaction of the borrower. Sometimes the indemnity will be limited to losses arising from specific breaches of the finance agreement, and sometimes it will be broader. Legal advice is required to properly understand the scope of the indemnifier’s possible liability.
The lender doesn’t have to pursue the borrower for performance before pursuing the indemnifier, they can pursue the indemnifier first or at the same time, as an indemnity forms a contractual duty to hold the lender harmless from loss.
Depending on the terms of the deed of guarantee and indemnity, the guarantor and indemnifier may be opening themselves up to personal liability. Lenders or finance providers should insist that independent legal advice is taken before a deed of guarantee and indemnity is signed. If you are asked to sign a deed of guarantee and indemnity, call the team at Francis Wilks & Jones to discuss your legal position.