#3318 - Main Clauses In A Guarantee Crib Sheet - Finance and Capital Markets

Main Clauses in a Guarantee

1. Pure Guarantee

   1. Provides that the guarantor will automatically be in breach of its obligations under the guarantee if a borrower fails to fulfil its obligations

   2. Gives a lender an action in damages against the guarantor as it makes the guarantor in breach of its own agreement

      1. Lender has a duty to mitigate its loss in a damages claim

      2. Hope v Premierpace (Europe) Limited - Lender cannot bring insolvency proceedings against the guarantor in a damages claim

         1. McGuinness the High Court cast some doubt on this decision
            

2. Conditional Payment Guarantee

   1. A Guarantor promises to fulfil the obligation if a borrower is in breach

      1. It does not automatically put the guarantor in breach of its own obligations under the guarantee

   2. Gives a lender an action in debt

      1. Lender has no duty to mitigate in a debt claim

      2. McGuinness A debt obligation on the part of the guarantor allows the lender, in principal, to be able to pursue the guarantor in insolvency proceedings
         

3. Indemnity

   1. Creates a binding obligation for a guarantor to indemnify a lender for any loss not covered under the guarantee

   2. If the guarantee is set aside for any reason, this clause will remain valid

      1. More watertight for the lender

   3. HOWEVER although an indemnity is a primary obligation, it is only as good as the person giving it

      1. Is the guarantor solvent?
         

4. Continuing Guarantee

   1. Often applies in the case of a revolving loan facility

   2. Overrides the rule in Clayton’s Case (first-in, first-out principle)

      1. Parties will want this included to ensure that the guarantor remains liable for the amounts that are paid off and then redrawn under the revolving credit agreement

      2. If the clause was not included then the liability of the guarantor would be discharged for amounts repaid.

         1. When new amounts are redrawn, the guarantor would no longer be liable for them
            

5. Reinstatement

   1. Protects a bank on the insolvency of the borrower

      1. If a borrower faces insolvency and any repayments to the bank are subsequently made void or unlawful as a result of 238, 239 or 245 IA 1986, then a guarantor will still be liable for these amounts
         

6. Waiver of Defences

   1. Waives all the common law defences that would make the guarantee agreement void

   2. Allows the bank to vary or make alterations to the primary obligation that will not vary or release the guarantee agreement or the guarantor

      1. The guarantee obligation is secondary and therefore should the primary obligation of the borrower be varied, such as granting it extra time, this waiver of defences prevents the extra time being granted to the secondary guarantor obligation as well

         1. If the borrower is granted extra time, the interest continues to increase and the borrower needs to remain financially healthy for longer. This therefore increases the obligation on the guarantor

   3. This clause is not required in respect of the indemnity provision as the indemnity creates a primary obligation in its own right
      

7. Appropriations

   1. Creates a suspense account for borrower repayments to be paid into

      1. Clause ensures that the bank can claim against the total sum owed upon any insolvency of the borrower

         1. Guarantor is likely to object to this clause as the borrower has technically made the repayments under the primary obligation and thus the guarantor’s liability should be discharged in respect of the sums already repaid. However, as the bank has not received the funds as they have remained in a suspense account, it can claim against the guarantor the entire debt owed to it

            1. A lender cannot recover more than it was originally owed under the credit agreement

         2. A bank will want to include this clause as, by putting the money in a suspense account, it can claim on insolvency of the borrower the full amount it is owed and in ultimately obtain a higher percentage of what it is owed. If it were to receive the repayments, the proportion repaid would discharge the borrower’s liability and the lender will have to claim a lower percentage as a creditor in insolvency proceedings

      2. Clause allows the bank to apply any money received to different indebtedness

         1. Allows a lender to pay off an overdraft facility or a term loan first, depending upon its own personal preference

            1. Guarantor is likely to object to this clause as it is unlikely to have guaranteed an overdraft. It will want repayments to first pay off the term loan, discharging its liability, rather than any overdraft facility
               

8. Non-competition

   1. Protects a bank against a guarantor claiming any sums from a borrower or co-guarantors before the bank is repaid in full
      

9. Changes to the Parties

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