A guarantee is an undertaking by one person (the guarantor) to perform an obligation of another person (a borrower or other debtor), given in favour of the person to whom that obligation is owed (the beneficiary). A guarantee is what is known as a “secondary” obligation – this means that the guarantor is only liable if the borrower or debtor has failed to perform the “primary” obligation, which is the obligation of the borrower or debtor which has been guaranteed. In the context of a loan agreement, a guarantee is an undertaking from the guarantor to the lender that the borrower will perform the borrower’s obligations under the loan agreement, the most relevant obligation being to repay the loan and interest. If the borrower does not pay, the guarantor will perform the obligation itself and make the payment instead of the borrower.

Why are guarantees also given as indemnities?

Guarantees are almost always drafted both as a guarantee and as an indemnity. Unlike a guarantee, an indemnity is a “primary” obligation – it is an undertaking from one person (the guarantor) to pay the beneficiary if the beneficiary suffers loss as a consequence of a specified event. In the case of an indemnity which is part of a guarantee for a loan, the specified event is the non-payment of the loan or other breach of the loan agreement. As a primary obligation of the guarantor, the indemnity is independent of the obligations of the debtor or borrower. An indemnity should, unlike a guarantee, remain in effect should the underlying loan agreement or equivalent transaction be set aside or if the borrower is somehow discharged from its obligations under the loan agreement.

What are the formalities of a guarantee?

A guarantee must be in writing and signed by the guarantor (or the guarantor’s agent). It is usual also for a guarantee to be executed as a deed, to avoid an argument that it lacks contractual consideration.

Does an individual require independent legal advice before giving a personal guarantee?

To avoid the possibility of a guarantee given by an individual being potentially set aside by reason of the guarantee having been given under duress or having been procured by undue influence, a lender may require the individual guarantor to seek independent legal advice before entering into the guarantee. This is particularly the case if the individual guarantor is the husband or wife of a shareholder of the corporate borrower.

Guarantee: individual guarantor

Name: Guarantee: individual guarantor - PaperRock Documents
SKU: FIN008.001
Price: 35.00 GBP
Availability: InStock

This Guarantee is for an individual to guarantee the obligations under a loan agreement of another company. It is suitable where the borrower is a company incorporated in England and Wales.

When do I use this document?

Guarantee from an individual (as opposed to a company) for a corporate borrower’s obligations under a loan agreement. The guarantee is in the form of a standalone Deed of Guarantee between the guarantor and the lender

Use this document:

for a guarantee to be given by an individual for a company’s obligations under a loan agreement
for a guarantee in the form of a standalone Deed of Guarantee
where the borrower is a company incorporated in England and Wales

What key features are included?

13 clauses over 6 pages
standalone deed of guarantee
guarantee undertakings given by way of both guarantee and indemnity
standard creditor protections for the continuing effect of the guarantee
limit of liability of guarantor for up to a specified amount
warning notice to guarantor to take independent legal advice

What else do I need to know?

A lender will typically require that an individual guarantor takes independent legal advice before entering into the guarantee. This is done to avoid the possibility of a guarantee being potentially set aside by reason of the guarantee having been given under duress or having been procured by undue influence. This is particularly the case if the individual guarantor is the husband or wife of a shareholder or director of the corporate borrower.

The lender will also require that the independent legal advisor confirms in writing to the lender that the guarantor has received independent legal advice on the guarantee, that the guarantor understood that advice and is willing to enter into the guarantee. For a form of independent legal advice letter, see

Individual guarantor: independent legal advice letter.

What other documents are available?

For a form of guarantee to be given by a company (as opposed to an individual), see

Guarantee: corporate guarantor

For a guarantee clause to be included in a loan or other agreement, see

Guarantee: contract clause

Description

When do I use this document?

as the disclosure letter to be delivered at closing of an investment in a private limited company
for general and specific disclosures to be given by the persons acting as warrantors under the investment or subscription agreement

What are the key features?

in letter form from the warrantor(s) to the investor(s)
introductory paragraphs, linking the disclosure letter and disclosures to the warranties in the investment or subscription agreement
general disclosures of certain matters, including:
- the contents of the disclosure documents, which are usually the documents provided to the investor(s) during due diligence and to be set out in an index to the disclosure letter
- in relation to commercial property, matters available from public searches
- matters which would be available from:
  - a Companies House search of the target company
  - a winding-up search on the target company
  - a search of the UK Intellectual Property Office
- matters disclosed in correspondence between the parties and their advisers
specific disclosures against the warranties to be included in table form

What else do I need to know?

Corporate transactions usually involve one party (the warrantor) providing warranties to another party concerning the company and its business, financial performance, prospects, assets, contracts, rights and liabilities. A breach of the warranties may result in a legal claim against the warrantor for damages for breach of contract.

The warrantor may wish to disclose specific events or circumstances as exceptions to certain warranties. The disclosure of these matters is intended to shield warrantor against a potential claim for breach of the particular warranties. Instead of amending or qualifying the warranties themselves, the disclosures against specific warranties are set out in a separate letter prepared by the warrantor, known as a “Disclosure Letter”.

As an example in an investment transaction, the agreement may include a warranty that the target company has complied with all legal requirements in its business conduct. If the founders, acting as warrantors, are aware of a failure by the company to comply with a specific legal requirement, they would disclose this as an exception to the warranty. This is done by setting out a narrative of the circumstances of the breach, along with supporting documents, in the Disclosure Letter. If the disclosure satisfies the defined requirement of “fair disclosure” in the investment agreement, it should shield the founders from a claim under the investment agreement for breach of this warranty regarding the disclosed non-compliance.

The warranties may explicitly require that certain facts or documents be included in the Disclosure Letter. For instance, a warranty might require that the Disclosure Letter contains details and copies of all material contracts entered into by the target company. Failure to disclose a material contract may result in a claim against the warrantors for breach of warranty if the omission causes loss to the investor(s).

Upon receiving disclosures during transaction negotiations and discussions on the draft Disclosure Letter, the investor(s) have several options:

to accept the disclosure, with the result that the investor(s) have no legal recourse if the disclosed matter leads to an actual liability or loss
to request specific indemnity cover from the warrantors in the investment agreement to cover the disclosed matter, under which the investor(s) may be able to recover any resulting liability or loss notwithstanding the disclosure
to renegotiate the transaction terms, such as adjusting the company’s pre-investment value, or hold back some investment until the risk of a liability or loss has expired in the future
to withdraw from the transaction entirely

What other documents are available?

For a disclosure letter for use in a share purchase transaction, see

Disclosure Letter – share purchase

For a disclosure letter for use in a business purchase transaction, see

Disclosure Letter – business purchase

Explanatory Guides

As with all of our document templates, your purchase will include access to clear explanatory guidance on the document and its use.

£35.00 exc VAT

Updated by a lawyer on 04/09/2024

Updated By a lawyer on 01/05/2023

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