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Is a guarantee a contract? Should a guarantee be executed by deed?
Consideration is sometimes difficult to establish and execution by deed minimises the risk that the guarantee can be successfully challenged on this basis. Also, execution by deed extends the period during which the beneficiary may claim from 6 to 12yrs
To what extent can a guarantee be enfroced
Only to the same extent that the loan agreement can be enforced in the absence of any agreement to the contract.
In practice, most banks will include a clause that allows them to enforce the guarantee independently of the underlying loan agreement
Will a material variation in the terms of the loan agreement discharge liability under the guarantee?
- - The guarantee agreement states otherwsie
- - The guarantor agrees in advance that changes can be made
Name three things a director should consider before giving a guarantee for the company
- - The director's own financial position: will he be able to repay the bank
- - The financial position of the borrowing company: how likely is default
- - The identity of other guarantors: how likely is liability to fall on him
Is the guarantee by a subsidiary to a parent company for an overdraft likely to constitute financial assistance?
No - unless the overdraft is linked to the purchase of shares in the parent company.
Also, an overdraft is unlikely to be used for this sort of transaction
Name three things that a lending bank would be concerned with before lending to a corporate borrower
- 1. The financial health of the company
- 2. Whether or not the directors can show sufficient commercial benefit to the company in giving the guarantee
- 3. Any contractual restrictions on the company which may prevent it from giving the guarantee.
Why are guarantees sometimes referred to as quasi-securities?
Whilst they are dessigned to reassure the lender, they are not 'full blown' security because they do not rank ahead of ordinary creditors on the guarantor's insolvency.
What is a guarantee?
A promise to be liable for the debt, or failure to perform some other legal obligation, of another
Is a guarantee a secondary obligation? What does ths mean?
The guarantor undertakes that the principal debtor will perform his obligation and that he (the guarantor) will be liable if not.
This means that if the principal obligation turns out not to exist/be void/diminished so is the guarantor's obligation.
Does a guarantee have to comply with the Statute of Frauds 1677? Why? How can this be done? What are the consequences of non-compliance?
Yes. Because the statute applies to secondary obligations.
- 1. Having a written agreement signed by the party charged or his agent OR
- 2. Having a memorandum of the agreement (which may be oral) similarly signed
- Note: the consideration does not need to be evidenced in this way but all material terms must be included.
If this is not complied with the guarantee is unenforceable (not void)
What is a letter of comfort? Why/when is it given? Is it legally binding?
- When a formal guarantee cannot be given
- Usually only morally and not legally binding
Is it a problem if special terms are agreed but no corresponding adaptation is made in the form of guarantee employed by the bank
E.g. standard form guarantee agreement, unusual oral guarantee agreement.
This may be unenforceable (Barclays Bank v Caldwell)
Can parol evidence be admitted to remedy any deficieny in evidencing a guarantee in writing as required by the Statute of Frauds 1677?
No. It is admissable to explain the terms used.
Can a guarantee in writing that does not contain all material terms be recitified?
Can partnerships enter into guarantees?
Yes. See s.5 partnership act.
Must consideration be given in return for giving a guarantee? When will consideration be no good? Name 2 examples of good consideration
Yes, unless executed by deed.
- Consideration is insufficient if:
- - it is wholly past
- -consists merely in keeping the customer's overdrawn account open
- - consideration is an act and the act has not been performed
- Good consideration could include:
- Agreeing to forebear/Forbearing to sue the customer/enforce its rights in relation to existing
Name 5 situations acts of the creditors which, unless the guarantee otherwise provides or the guarantor consents, will mean that the guarantor will be discharged
- 1. Creditor releases prinipal debtor or enters into a binding agreement with the principal debtor to give him time.
- 2. Agrees with prinipal debtor to vary the terms of the contract agreed (unless insubstantial or cannot be prejudicial to guarantor)
- 3. Releases security that he holds for the guaranteed debt
- 4. Releases any co-guarantor who is jointly/jointly and severally liable with guarantor
- 5.Breaches a term of his contract with the principal debtor in a 'substantial' way
- 6. Acts in bad faith towards guarantor or connives at the default of principal debtor
Will irregular conduct by the guarantor, even if it prejudices the guarantor, release the guarantor?
No (see Mount v Baker Austin)