A guarantee is a document often requested by a bank, landlord, supplier, or other supplier with whom you may be dealing in the course of your business. When there are two or more guarantors of the same debt, there is another significant risk. The assumption many people make, when signing a guarantee with someone else, is that, upon default, the bank or other supplier to whom you have guaranteed payment, will neatly divide the debt amongst the number of people signing the guarantee, and go after each guarantor for his or her proportionate share of the debt. Not so. Most guarantees carry the words “joint and several” to describe the nature of the multiple party guarantee. Those words mean that the bank can go after any one of the guarantors to collect the entire debt.
There are several ways to reduce this risk. one is to ask the supplier to limit each guarantee to a proportionate share of the debt, so that the bank can only go after each guarantor for the amount of the debt on his/her guarantee – we call that “several liability”. Another way is to ensure that there are sufficient assets secured by the supplier from the business to cover the debt. A final way is to ask those other guarantors to provide the asset-rich guarantor with security for the repayment of his/her share of the debt.
In short, it is extremely important, before signing on as a guarantor on a debt or obligation, that you obtain legal advice on your options for reducing your risk under the guarantee.