Anyone considering providing a guarantee should be aware of the potential of being saddled with a liability beyond what they anticipated when signing the guarantee.

Guarantees, particularly those required by financial institutions, will often contain an “all moneys” clause. This means that the guarantor is liable to the lender for all moneys which become due and payable by the principal debtor. A guarantor may think that he or she is only guaranteeing one particular obligation or debt for the principal debtor when in fact the terms of the guarantee can make the guarantor liable for any debt whatsoever that the principal debtor owes to the lender.

If the principal debtor defaults in repayment of the loan, then the lender can immediately demand that the guarantor pay any outstanding liabilities of the principal debtor. There is generally no obligation on the lender to first attempt recovery of the debt from the principal debtor.

It is plain then that the potential effect on the guarantor who is called upon to satisfy an all moneys guarantee can be ruinous, and may culminate in the guarantor’s bankruptcy if he or she does not have sufficient assets to satisfy his or her obligations under the guarantee.

In special circumstances a court can order a guarantee to be set aside or varied. However anyone who is considering providing a guarantee should read the terms of the guarantee very carefully and seek legal advice where appropriate.

For more information contact  Dan Fleming on d.fleming@pigott.com.au