Guarantee versus indemnity

Finance documents frequently contain both a guarantee and an indemnity. They are related but legally distinct promises. An indemnity can create a direct payment obligation that is not always dependent on the lender first establishing liability under the guarantee.

“All monies” exposure

Some guarantees secure more than the single advance the guarantor has in mind. Definitions of secured money, guaranteed obligations and finance documents should be checked to understand whether future advances, fees, enforcement costs and interest are also covered.

Joint and several liability

Where there are multiple guarantors, the lender may be able to pursue one guarantor for the full guaranteed amount rather than dividing the debt equally. Rights of contribution between guarantors are separate from the lender’s enforcement rights.

Mortgages and security

A guarantee may be supported by a mortgage or other security over personal property. That changes the practical risk because the lender may have direct enforcement rights against the secured asset subject to the document and applicable law.

Guarantee caps and limitations

Some guarantees are capped; others are unlimited. A cap should be checked carefully because interest, costs or separate indemnity obligations may sit outside the headline number depending on drafting.

Independent legal advice explains the legal effect and risks of the documents. It is not an assurance that the business will succeed, the property will increase in value or the borrower can afford the debt. Those are commercial and financial questions for the guarantor and appropriate advisers.

Questions guarantors should ask

  • What exact debts are covered?
  • Is liability capped?
  • What security am I giving?
  • Can the lender change or extend the facility without fresh consent?
  • Can the lender pursue me before enforcing against the borrower?
  • What happens if another guarantor is released?
  • How and when can the guarantee end?

Documents to bring to the advice appointment

Provide the facility agreement, guarantee, mortgage or security documents, lender instructions and any certificate the solicitor is asked to sign. If the lender has issued multiple versions, confirm which version is intended for execution.

Official resources

Important: This article is general information only and is not legal, tax, financial or accounting advice. The legal outcome can depend on the documents, dates and facts. Obtain advice about your circumstances before acting, particularly where a statutory deadline applies.