Taking And Enforcing Guarantees In England And Wales

As a guarantee is a contract, both the guarantor and the recipient must intend to create legal relations between themselves. Unless it is made under seal (i.e. by deed) the guarantee must be accompanied by valuable consideration (i.e., some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party). The guarantee must also be in writing (unlike an indemnity which may be made orally) and signed by the guarantor, otherwise section 4 of the Statute of Frauds 1677 will render it unenforceable. It follows that a guarantee cannot be given by telex.

A guarantee, whether given by an individual, partnership or company may be discharged in the following circumstances:

Except where the payment amounts to a voidable preference (see paragraph A10 below), if the principal debtor pays the debt, the guarantor is discharged from all liability under the guarantee.

Similarly, payment of the debt by the guarantor puts an end to his liability under the guarantee, unless it amounts to a voidable preference (see paragraph A10 below).

The guarantor may have the guarantee set aside if he was induced to enter it by a misrepresentation of an existing fact, even if the misrepresentation was made innocently.

In the absence of an express contractual provision to the contrary, if the guarantee is of a type which is revocable (i.e. where the guarantee is for a series of advances, as opposed to a single advance, and the guarantor can give notice that he will not be liable for any future obligations, but will retain liability for sums already advanced), the death of the principal debtor will operate as revocation of the guarantee. The revocation means that the guarantor would not be liable for any future advances, although he would remain liable for existing sums: for example, in Simson v Cooke (1824) 1 Bing 452, the guarantor was liable for such sums as would be advanced to meet bills drawn by two persons, J and T, but his obligation did not extend to bills drawn by J after T’s death. The general principle is one of co-extensiveness: in the absence of an agreement to the contrary, the guarantor will be discharged from further liability

Any material variation of the terms of the contract between the recipient and the principal debtor will discharge the Guarantor. A variation is material if it affects the risk of default by the principal debtor (and not merely if it affects the amount of the guarantor’s ultimate liability). The guarantee will not, however, be discharged if the variation:

1. was authorised by the guarantor;
2. was expressly contemplated in the principal contract;
3. is unenforceable on the grounds of illegality; or
4. is to one debt or obligation and the guarantee extends to several distinct debts or obligations

and the guarantee and principal contract will normally be worded in such a way that a variation in the terms of the principal contract will be caught by (a) or (b) above, so that the guarantor will not be discharged.

A binding agreement between the recipient and the principal debtor to give the principal debtor time to pay will discharge the guarantor if made without the guarantor’s consent (regardless of whether he suffers any prejudice). It is usual to exclude this possibility expressly in the guarantee by providing that the recipient may give time to the principal debtor without in any way affecting the guarantor’s liability.

A guarantor is entitled to contribution from every co-guarantor and to the benefit of every security held by the recipient. As a result, the guarantee will be entirely or partially discharged if the recipient releases the security or the co-guarantors. The guarantor is entitled to an allowance equating to the value of the protection he lost. A guarantee will usually contain a clause denying the guarantor this right.

In the absence of agreement to the contrary, the guarantor will be released from all future liabilities if there is any change in the constitution of either the principal debtor or the recipient. This can cause substantial problems (e.g. where companies merge or banks are taken over, and see paragraph C2 for its effect on partnerships) and it is advisable to include a clause disapplying the general law.

A guarantor is discharged if the recipient releases the principal debtor from his liability. This release may be implied, for example where the principal debtor enters a voluntary composition outside bankruptcy law, and in practice the guarantee will usually include a clause that the guarantor’s liability will not be affected in such an instance.

Under section 239 of the Insolvency Act 1986, two elements are required if a transaction is to amount to a preference:

1. by entering into the guarantee the guarantor must put the recipient in a better position in a subsequent insolvency of the guarantor than the position in which the recipient would otherwise have been; and
2. the guarantor must be influenced by a desire to better the recipient’s position.

A guarantee given in such circumstances may be voidable as a preference unless the guarantor was solvent when it gave the guarantee and, within six months of the making of the guarantee (or two years if the recipient is a person connected with the guarantor, other than by reason of being an employee), did not become insolvent as a consequence of giving the guarantee.

Examples of preferences include payment in full of a debt to a particular creditor who would only have received partial payment on winding up or the giving of security to a creditor. As stated above a transaction cannot be set aside as a preference unless the company was influenced in deciding to give the preference to a person by a desire to put that person into a better position on liquidation than he would have been in had it not been done. Normally, it is for the guarantor’s liquidator/administrator/trustee in bankruptcy to prove that the guarantee is a voidable preference. However, such a desire is presumed where the preference was given to a connected person, which includes any director of the company. (This presumption is rebuttable: Re Fairway Magazines [1993] BCLC 643). Where payment was made or security was given to a creditor because he was threatening proceedings or otherwise insisting on payment he will usually be able to show that there was no desire to put him in a better position on liquidation. Re M C Bacon Ltd [1990] 3 WLR 646, established that it is a valid defence to show that the guarantor had no choice but to enter the guarantee, since without the element of choice there would be no desire on the part of the guarantor to put the recipient in a better position by entering the guarantee. The guarantor was merely responding to commercial pressure.

Under section 238 of the Insolvency Act 1986, a guarantee would be a transaction at an undervalue if the guarantor itself received no consideration or such consideration was significantly less than the consideration provided by the guarantor. In those circumstances, the guarantee would be vulnerable to being set aside if the guarantor becomes insolvent unless:

1. the guarantor was solvent when it gave the guarantee and, within two years of entering the guarantee, did not become insolvent as a consequence of giving the guarantee; or
2. the guarantee was given by the guarantor in good faith for the purpose of carrying on its business and at the time it did so there were reasonable grounds for believing that the transaction would benefit the guarantor. It is therefore a valid defence to show that the guarantor was motivated by proper commercial considerations in entering the guarantee. To avoid section 238 problems, it is essential that the guarantor itself should receive some commercial benefit from the transaction, so it is insufficient if consideration for the guarantee is given by the recipient to, for example, the principal debtor. Where the guarantor is a company or a partnership, it may be helpful in demonstrating commercial benefit if the minutes of the board or partners’ meeting where the decision was taken to enter the guarantee detail the benefits to the guarantor of entering into the guarantee.

Again, it is for the guarantor’s liquidator/administrator/trustee in bankruptcy to show that the guarantee should be set aside and if the guarantee is shown to be a transaction at an undervalue, the court may make such order as it sees fit to restore the position to what it would have been had the guarantor not entered into that transaction at an undervalue.

A transaction cannot be set aside if it was entered into in good faith for the purposes of carrying on the company’s business and at a time there were reasonable grounds for believing that the transaction would benefit the company. For this reason a transaction cannot be set aside when the company sells stocks or other assets at a reduced price so as to overcome cash flow problems.

Sometimes banks will ask a corporate guarantor’s directors to issue a declaration of solvency (i.e. a declaration that the corporate guarantor is solvent and will not become insolvent as a consequence of entering into the guarantee). This could be backed by an auditor’s certificate, although the certificate is likely to be heavily qualified. A directors’ declaration of solvency will afford some comfort to the bank, although if it is incorrect the possibility of the guarantee being set aside as a transaction at an undervalue remains and the only recourse of the bank would be against the directors personally.

The recipient should ensure that an appropriate insolvency search is made against the guarantor immediately prior to the guarantor signing the guarantee:

1. if the guarantor is an individual - the recipient should ask the County Court in whose area the individual guarantor lives for a bankruptcy search (or the High Court in London if the individual lives in London, is resident outside England and Wales or his residence is unknown), which will show whether there are any insolvency proceedings pending against the individual and whether he has discharged any former bankruptcies. A County Court search is free and will usually be made by the court officials; a High Court search costs, at present, £5 and the Recipient must arrange for someone to search through the records;
2. if the guarantor is a company - a search should be made at Companies House (for a fee of £5) and also at the Companies Court in London, where on payment of a £5 search fee, a search can be made by computer for any winding-up petitions against the company’s name;
3. if the guarantor is a partnership - a search should be made at the County and/or High Court in the names of the partners and of the partnership as a whole; and
4. if the guarantor holds any freehold or leasehold property - the recipient should undertake a search of the registers in the Land Charges Department of the Land Registry. By filling out Form K15 and posting it, with the fee (£1 for each name against which a search is made) to the local District Land Registry, the recipient can obtain an official bankruptcy search of the five different registers held by the Land Registry, which will show whether there are any entries outstanding on the registers .

Under section 423 of the UK Insolvency Act 1986, if the guarantor enters a transaction at an undervalue which is aimed at prejudicing the guarantor’s creditors or potential creditors, the court may make an order restoring the position to what it would have been if the transaction had not occurred or an order protecting the interests of the creditor. There is no need to prove fraud, only an intent to prejudice the creditors or potential creditors, however, the "victim" will only be successful against the recipient if it can be shown that the recipient had actual or constructive notice of the guarantor’s intention to prejudice a creditor or potential creditor. The transaction which is the subject of an action under section 423 can have taken place at any time; there is no time-limit.

A person lacks the capacity to act as a guarantor if he:

• is under the age of 18;
• is so mentally ill that his property is subject to the control of the court;
• is mentally ill and this incapacity is known to the recipient;
• is so drunk or under the influence of drugs at the time that the guarantee is given that the substance(s) prevent him from understanding the transaction and the recipient knows of this incapacity; or
• is bankrupt: it is therefore essential to undertake a bankruptcy search against the individual before he signs the guarantee.

There is a risk that the guarantee could be unenforceable if the guarantor entered into the guarantee under duress or because he was being unduly influenced at the time he entered the guarantee.

1. Duress

There are three types of duress:

1. duress to the person: this may consist of actual or threatened violence to the guarantor or members of his family. It is sufficient that such threats are a factor influencing the victim to enter the guarantee;
2. duress to goods: this is a threat of damage to the victim’s goods rather than his person; and
3. economic duress: this would involve the recipient or the principal debtor using its superior economic power in an illegitimate way so as to coerce the guarantor into agreeing a particular set of terms.

Proof that the guarantor was subjected to any of these types of duress when he entered the guarantee is likely to render it voidable.

1. Undue Influence

Undue influence may be either actual (which is very rare and would require proof by the guarantor of unfair and improper conduct towards him) or presumed. A presumption of undue influence may arise where there is:

1. manifest and unfair disadvantage: this equates to the making of a substantial gift or benefit which cannot reasonably be accounted for on the grounds of friendship, relationship, charity or other motives on which ordinary men act. The court will compare the potential benefit to the Guarantor with his potential liability under the guarantee; and
2. a relationship between the parties: a court will ask "could the principal debtor be expected to have influence over the guarantor?" and it is for the person alleging that they were unduly influenced to prove that such influence existed in their relationship.

The recipient can normally protect itself against subsequent claims that the guarantor was unduly influenced (or to a certain extent, acting under duress) by ensuring that the guarantor obtains independent legal advice before entering into the guarantee. It should be noted, however, that if the recipient is in possession of material information which is not available to the solicitor giving the independent legal advice or if the transaction is one which no competent solicitor could properly advise the guarantor to give, the availability of independent legal advice is insufficient to avoid the recipient being fixed with constructive notice of the undue influence (see Credit Lyonnais Bank Nederland N.V. v Burch [1997] 1 All ER 144).

Even where the guarantor had no legal advice prior to entering the guarantee, Woodel v BM Samuels Finance group Plc [1995] P&CR 311 shows that the guarantee will not be set aside if the guarantor has expressly reaffirmed the transaction or if he fails to take steps to set aside the transaction within a reasonable time. Therefore a failure to obtain legal advice before entering the guarantee can be cured if the recipient subsequently asks the guarantor to seek legal advice regarding the guarantee and the effects of waiving his rights to claim undue influence and then requires the guarantor to sign a declaration stating that the guarantor will not exercise any potential rights to set the guarantee aside. By signing such a declaration, the guarantor is expressly reaffirming the transaction and the guarantee will not be set aside. To be legally binding, however, this declaration must be accompanied by consideration or made by deed.

The guarantor’s death itself will not automatically terminate the guarantee. In the absence of an express contractual provision to the contrary, the guarantee will automatically be revoked (i.e. the guarantee will cease to be continuing in respect of the future liabilities of the principal debtor) once the recipient is told of the guarantor’s death. Where the guarantee contains an express provision to the contrary, the question is, "could the guarantor have revoked the guarantee by giving notice while he was alive?". If answered affirmatively, the guarantor’s personal representatives can similarly revoke the guarantee; if answered negatively, the personal representatives cannot terminate the guarantee by notice. It is usual, however, to permit termination by notice from the guarantor or his personal representatives, which has the effect of determining the guarantee so that while the guarantor’s personal representatives remain liable for existing debts, they will not be liable for sums advanced in the future.

Section 3.14 of the Banking Code requires participating banks to advise guarantors of the limit of their liability. If the recipient is a bank which participates in the Banking Code an unlimited guarantee should not be taken from an individual guarantor.

The Banking Code is a voluntary code followed by banks and building societies in the UK and regulates their relations with personal customers. It sets standards of good banking practice which are followed by banks and building societies subscribing to it. Although the Code is voluntary, the Independent Review Body for the Banking and Mortgages Codes monitors compliance and the bad publicity inherent in breaching the Code renders it advisable for a recipient to limit the liability of a guarantee given by an individual guarantor.

There are no registration or filing requirements in respect of guarantees given by individuals in England and Wales. No stamp duty or similar tax is payable on a guarantee given by an individual in England and Wales.

Generally a partner has no actual or implied authority to give a guarantee on behalf of a partnership so all the partners must sign the guarantee unless the partnership deed gives express written authority to any one of them, or a valid power of attorney has been executed by the partners in favour of the partner who is to sign the guarantee.

Where a guarantee relates to the liabilities of a partnership, it is essential to include a clause providing that the guarantee will continue despite any changes in the constitution of the firm, including new partners joining the partnership. If this clause is omitted, any change in the firm’s partners will leave any future advances unsecured, although the partnership would remain liable for existing advances, provided no further credits were allowed to be paid into the loan account so as to bring about the operation of the rule in Clayton’s Case (i.e. any payment credited by the creditor to a current account is presumed to discharge the earliest debit in the account in the absence of any appropriation by the debtor or of any contrary intention) . As shown in University of Cambridge v Baldwin (1838) 5 M & W 580, care must be taken in the drafting of the clause if it is to survive the death or retirement of any of the partners or the joinder of new partners, as a mere reference to the firm by name will probably not be sufficient to demonstrate an intention that the guarantee should continue after changes in the existing partnership. It is therefore advisable to insert a separate clause dealing with the matter expressly rather than trying to define "the partnership" or "the firm" in the widest possible terms.

Once a partnership enters a guarantee as a guarantor, as a general rule that guarantee can be enforced against all the people who were partners at the time the guarantee was made. However, the recipient should require the partners expressly to undertake joint and several liability because, in the absence of an express provision, the partners would only be jointly liable so individual partners could not be held liable under the guarantee.

Please see paragraph B5 above.

In order for a company to act as a guarantor, its board of directors must, at a duly convened and quorate meeting of the board, resolve to enter the guarantee and authorise the necessary people to sign, or attest the sealing of, the document on the company’s behalf. It is also essential if the transaction is not to be at risk of being set aside as a transaction at an undervalue (see paragraph A11) that the guarantor company itself (and not merely a company in its group) should receive some benefit from the transaction.

Section 36 of the Companies Act 1985 permits companies to execute documents either by seal or alternatively by the signature of a director and either the company secretary or a second director. If the guarantee is to be signed under seal, it is normal to use wording indicating that the person signs the document purely in his capacity as an officer of the company (for example, "by X as Managing Director of Company Y") as (provided the company is in existence) this precludes the possibility of the person who signs the document becoming personally liable under the guarantee.

Provided the recipient acts in good faith, the board’s decision is deemed by section 35(1) of the Companies Act 1985 (as amended by the Companies Act 1989) to be free from limitations in the company’s constitution. Consequently, it should be sufficient for the recipient to check the relevant Board Minutes and the company’s Articles of Association to ensure that the relevant board meeting was quorate and that the guarantee was signed by someone who was duly authorised by the board. However, the scope of section 35(1) of the Companies Act 1985 (as amended by the Companies Act 1989) is limited in two important ways:

1. it only applies to transactions authorised by the guarantor’s board of directors - the section has no application unless the board meeting was correctly convened and quorate and resolved to enter into the guarantee.
2. it only applies where the recipient acts in "good faith" - a recipient will not be acting in good faith if he knows that the powers of the guarantor’s directors are limited or if he ignores facts presented to him without making reasonable enquiries. It is the usual practice of banks in the UK to require a company opening an account at the bank to submit a copy of its Memorandum and Articles of Association. If the guarantor company has an account with the recipient, it is likely that the recipient will have notice of any limitations imposed on the guarantor by its constitution and section 35(1) will not apply because the recipient is deemed not to have acted in good faith.

It is essential that the recipient requires the guarantor company to provide copies of the board minutes at which the guarantee was authorised and the guarantor company must certify that the copies supplied are true and accurate copies of the originals. Most UK banks when entering into a guarantee will also, despite section 35(1), require the guarantor company to provide certified copies of the guarantor’s Memorandum and Articles of Association and will check that the guarantor company’s Memorandum of Association gives it power to enter into the guarantee and that its Articles of Association do not contain any restriction on the directors.

Not only is it necessary to consider the provisions of Section 238 of the Insolvency Act 1986 (see paragraph A 11 above) when taking a guarantee from a company, it is also necessary to consider the common law doctrine of "commercial benefit" set out in the 1984 decision of the Court of Appeal in Rolled Steel Products (Holdings) Ltd -v- British Steel Corporation. The doctrine provides that the directors of a company, when considering whether to enter into a transaction (e.g. the giving of a guarantee), must act in what they believe to be the interests of the company and not just in the interests of the group as a whole. If commercial benefit cannot be clearly established then the directors will be in breach of their fiduciary duty in resolving to execute the guarantee and if the recipient is on actual or constructive notice of this breach, the guarantee itself will be unenforceable.

In order to ensure the validity of a guarantee (subject to the rules regarding preferences and transactions at an undervalue in paragraphs A 10 and A 11 above) two steps should be taken. First, it is advisable for the directors to record in the board minutes authorising the giving of the guarantee the reasons why they believe entering into the guarantee is in the best interests of the guarantor company. Setting out their reasoning in this way will not protect the recipient absolutely, but it may assist.

Secondly, if there is any doubt as to whether the guarantee is in the guarantor’s commercial interest, the guarantor company should be asked to pass a special resolution (i.e. a resolution passed by a majority of not less than three-fourths of the shareholders and in respect of which special notice has been given) at a meeting of the shareholders (which should be unanimously passed by the shareholders) directing that the guarantee be given. By requiring a unanimous special resolution to be passed, the question of commercial benefit should disappear on the basis that the shareholders have sanctioned any potential breach by the directors of their fiduciary duties to act in the best interests of the company. It should be stressed, however, that commercial benefit is only one condition which needs to be satisfied on giving the guarantee and that it is also necessary to consider preferences (see paragraph A 10 above) transactions at an undervalue (see paragraph A 11 above) and also transactions prejudicing the Guarantor’s creditors or potential creditors (see paragraph A 12) above.

It should be noted that (subject to certain very limited exceptions) a company is prohibited from making loans to its directors or directors of its holding company. A company is also prohibited from entering into any guarantee or providing any security for a loan made by any person to such directors (see section 330 of the UK Companies Act 1985). The rules are even more stringent in the case of public limited companies and their subsidiaries. Any guarantee or security given by a company in respect of a loan made to its director in breach of section 330 is liable to be set aside. In the case of a public limited company or its subsidiary, breach of section 330 is also a criminal offence for both the directors of the company and also the recipient if it knew of the breach.

5.Unlawful financial assistance by a company for the acquisition of its own shares

Subject to a number of limited exceptions, it is unlawful for a company or any of its subsidiaries to give financial assistance (e.g. a guarantee) for the purpose of assisting a third party to purchase its shares or to reduce or discharge a liability incurred in connection with such purchase (see section 151 of the UK Companies Act 1985).

Breach of section 151 can result in a fine against the company and/or its directors being liable to a fine or imprisonment or both as well as the transaction constituting the financial assistance being set aside.

There is an important relaxation of the above prohibition concerning private companies, provided the financial assistance does not result in the company’s net assets being reduced or, to the extent that they are so reduced, the reduction is met out of its distributable profits. (See section 155 of the UK Companies Act 1985). In addition, section 155 requires a procedure to be followed which includes the directors of the company giving assistance making a statutory declaration that such company will remain solvent for 12 months which has to be supported by an auditors’ report and the shareholders of the company have to authorise the giving of the assistance by passing a special resolution.

Guarantees created by companies are not subject to registration at the UK Companies Registry or filing unless the guarantee contains a charge over the guarantor company’s property, assets or rights (e.g. a charge over credit balances in a bank account) which is registerable under Section 395 of the UK Companies Act 1985 within 21 days of its creation for which a fee of £10 is payable. No stamp duty or similar taxes are payable on guarantees issued by companies in England and Wales.

A recipient who wishes to enforce a guarantee against the guarantor will need to ensure that his cause of action has accrued which means that he needs to ensure that all relevant conditions precedent to the guarantor’s liability have been fulfilled. In the case of a guarantee, the liability of the guarantor accrues at the earliest when the principal debtor defaults in his obligations.

Before demand is made on the guarantor under a guarantee to a bank (which is invariably stated to be payable on demand), it is best practice for demand to have been served on the principal debtor within normal banking hours and time allowed for him to meet it. Demand can then be made on the guarantor for the sum demanded from the principal debtor unless the guarantee imposes a lower limit. Again the demand should be served during normal banking hours and time allowed for the guarantor to meet it.

It is important that the demand (which should require payment of a stated sum) does not overstate the amount due, although a minor error in the amount due will not invalidate a demand.

A specimen form of demand is attached.

The relevant period of limitation for action on a contract of guarantee, as on any other contact is six years from the accrual of the cause of action, namely when the guarantor first becomes liable to make payment. If the guarantee is executed as a deed, the period will be 12 years.

Section 6 of the UK Limitation Act 1980 provides that if a contract of loan does not provide for repayment of the debt on or before a fixed or determinable date, and does not effectively make the obligation to repay conditional on the demand for repayment made by or on behalf of the creditor, time will start to run from the date on which a written demand is made by the creditor for repayment of the debt.

Most standard form bank guarantees which relate to transactions which take place in England now contain a clause which expressly provides that the contract is to be governed by English law and that disputes between the parties are to be referred to the English courts. Generally speaking, if the guarantee contains an exclusive jurisdiction clause, and the recipient brings proceedings in the designated court, he will normally be able to resist any attempt by the guarantor to have the dispute dealt with by another court.

As a general rule, if the liability of the guarantors is several, or joint and several, the recipient may sue the guarantor independently without joining in other parties to the action, or he may sue some or all of them. If it is joint, however, all the relevant parties should be joined because judgment against one would operate as a bar against the rest.

Once a creditor has proved the existence of terms of the guarantee itself, he must establish that the guarantor is liable, which will in turn normally involve proving that the principal debtor himself is liable. A well drawn guarantee will contain a "conclusive evidence clause" which provides that a notice in a certain form or a demand by the recipient, is conclusive evidence as between the recipient and the guarantor that the principal debtor is liable. Conclusive evidence clauses are especially useful where the accounts as between the recipient and the principal debtor are fairly complex and it would take a long time to prove each and every entry on the credit and debit sides.

Before issuing proceedings against the guarantor, the recipient will wish to ensure that he is likely to recover something from the guarantor. If the recipient has evidence that the guarantor is likely to remove assets from the jurisdiction or otherwise dissipate them so as to render any judgment against him worthless, he may apply to the court for a "freezing order" or other appropriate interlocutory relief. A freezing order, previously known as a Mareva Injunction, is an order preventing a person from disposing of his assets up to a certain value. The injunction may be expressed in terms which cover assets belonging the defendant outside the jurisdiction, although it is unusual for the court to be willing to grant a "worldwide" freezing order.

It is possible for the recipient to prove against the estate of an insolvent guarantor on his guarantee. The recipient must give credit for any sum which he has already realised before proving, and for dividends which have been declared in the principal debtor’s bankruptcy, even if not actually received by him.

Normally if the principal debtor is known to be insolvent, the recipient will bring his action against the guarantor instead. The recipient may, however, also prove in the bankruptcy or liquidation of the principal debtor.

If liability of the guarantor has not accrued by the time that he dies, the general rule is that his personal representatives cannot be forced to set aside a sum out of his estate to meet a potential future liability on the guarantee. However, if the liability of the guarantor has already accrued, a sufficient sum must be set aside out of his estate in order to meet that liability, even if there is a prospect that the principal debtor might pay the debt instead.

Where the guarantor discharges the debt which he has guaranteed, he is entitled to step into the shoes of the creditor and, under the doctrine of subrogation, pursue any claims against the debtor which the creditor had, including by enforcing securities held by the creditor for the debt, whether made before or after the guarantee (Mercantile Law Amendment Act 1856).

The doctrine of subrogation arises by operation of the law to prevent the debtor being unjustly enriched; it is available whether the guarantee was given at the request of the debtor or the creditor.

For the purposes of subrogation, although the payment of debt extinguishes the debt, any other securities given by the principal debtor to secure the principal debt are kept alive for the benefit of the guarantor who is entitled to have them transferred to him together with any judgement obtained by the creditor.

The guarantor can only claim a right to subrogation to securities or other rights of the creditor where he has paid the debt in full: a proportionate right of subrogation does not exist.

Where two or more guarantors are liable for the same obligation to the same amount, the extent of the liability is shared equally between them, unless otherwise agreed. So, where one guarantor has paid the full guaranteed amount, he is entitled to claim reimbursement from his co-guarantor in an equitable action for contribution.

The guarantees need not be created by the same instrument and indeed the fact that each guarantor was unaware of the other’s existence does not affect the right to contribution.

Where the guarantees cover the same obligation but in different amounts, each guarantor must contribute in proportion to their respective liabilities.

It is a long-established common law principle that there cannot be two proofs in respect of the same debt. A guarantor can not prove in liquidation unless the creditor has not or is no longer entitled to prove, (e.g. because the guarantor has paid him in full).

The rule against double proof prevents a guarantor proving in the winding up of the debtor company as a contingent creditor until he has discharged the entire guaranteed indebtedness. Until he has discharged the whole indebtedness, the creditor is entitled to prove in respect of the whole indebtedness. the guarantor is debarred by the rule against double proof from making any claim at all.

The test to be applied when deciding whether or not the rule against double proof applies is a broad one, and is simply whether the two competing claims are in substance claims for payment of the same debt twice over.

Taking and enforcing guarantees is a complex subject and as such this note is only intended as a general guide. It should not be relied upon as a substitute for advice in particular circumstances.