HomeFWJ TakeawayWhat is an indemnity?

Often, loan or finance documentation will include various indemnity provisions.

  • these usually provide that if the borrower breaks the agreement and this incurs the finance provider in additional costs, then the borrower will reimburse the finance provider for that cost.
  • for example, if the borrower fails to pay money when it is due, or breaches the terms of the agreement, there may be costs which the lender will incur in chasing payment and/or monitoring the facility which it will seek to recoup pursuant to the indemnity.

In addition to the above, an invoice finance provider or asset based lender will often require an indemnity or guarantee or both from the directors of the company that they are financing. The indemnity is essentially a personal promise from a director to take responsibility for the finance provider’s loss. Usually this will be triggered if there is a breach of the finance agreement, and the indemnifier (the person who gave the indemnity) will be liable for any loss suffered as a consequence of the specified breach.

  • not all indemnities are equal and it is important to take independent advice when being asked to sign a document that contains any form of indemnity;
  • as a primary obligation, an indemnity has a wider reach than a guarantee;
  • an indemnifier will still carry a liability even if the businesses obligations are increased by variation;
  • conversely, a guarantee is a secondary obligation, which relies on the original obligation remaining alive. Generally speaking, if the underlying agreement is set aside or the borrower is discharged, then the guarantor’s obligations will also cease.

The rules for guarantees and indemnities are different, and it is easier to become bound by an indemnity than to a guarantee as it does not have to be in writing (but usually is).

Its best to raise concerns before you sign a document, rather than waiting until it’s time to enforce it. Whether you are looking for sound independent legal advice before signing a guarantee or indemnity, or looking to take resilient security for finance, the team at Francis Wilks & Jones are here to help – call us today for a friendly conversation about your needs.

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