|
A person operating a business through a company will often be asked to personally guarantee the company's lease, credit and loan obligations, as may the spouse, parents or any other person with financial means that knows the business owner.
A guarantee does not have to be in writing but normally is. A guarantor is in a similar position to the principal debtor. The guarantor is expected to find out if the debt is being paid, but the creditor does not have to tell the guarantor if the debtor is in arrears.
Little protection is given to business guarantors outside the common law. In particular, company directors who guarantee their company are given little protection. A guarantee cannot be avoided simply because the guarantor did not think carefully about implications of the guarantee or signed the guarantee on the say so of a spouse or child or because the guarantee was never explained to the guarantor or no time was taken by the guarantor to think before signing the guarantee. Even if a director resigns, she or he will still be liable.
A guarantee signed under 'undue influence' may be void. This occurs where the guarantor is urged to sign by a debtor who was in a position of strength in relation to the guarantor, who apparently did not have the mental capacity to reject the guarantee. It must be shown that the position of the person benefiting from the guarantee exerted substantial mental or emotional pressure on the guarantor who did not receive independent legal advice.
A guarantee may also be void if signed as a result of 'unconscionable conduct'. This may occur where the guarantor is under a disability such as illiteracy, old age, youth, lack of understanding or emotional vulnerability. If that disability is knowingly taken advantage of without the guarantor receiving independent legal advice the guarantee may not be enforced, see consumer protection.
Most credit providers will insist that guarantors get independent legal advice. It is rare for a guarantee to be declared invalid. Detailed evidence of the circumstances of the guarantee being signed and the life history of the guarantor must be given to a court. Legal costs will consequently be high if the matter is disputed. |