Latest News [index] Guarantee Warning
We regularly advise clients who have been asked to guarantee bank borrowings. As well as ensuring an understanding of the obligations that are being assumed it is also useful for us, as your legal adviser, to have a record of guarantees that have been given. This is particularly important when a guarantee is given in favour of a company.
The reason for this is that a guarantee will continue until it is withdrawn. However, it is not often appreciated that the sale of shares in a company does not, by itself, withdraw or terminate existing gurantees.
Example:
Victor is the sole director and shareholder of Centrifuge Supplies Limited. Centrifuge has a trading account with Laboratory Supplies Limited that has been guaranteed by Victor. Victor's guarantee is unlimited. Victor sells his shareholding in Centrifuge to Patricia. Victor resigns as a director at the same time and Patricia is appointed as a new director. Centrifuge's business does not prosper under Patricia's management and the account with Laboratory Supplies is significantly in arrears. Laboratory Supplies seeks to recover the amount owing from Victor pursuant to the guarantee. The fact that Victor sold the shares and retired as a director is not by itself any defence to the claim.
Managing Guarantees
We recommend that any person obtain advice before entering into a guarantee. This is particularly important before entering into gurantees that are included as part of standard "terms and conditions" as the obligations that are being assumed may be less clear than with say, a bank gurantee.
Regardless of whether advice is obtained prior to entering into any gurantee it is also recommended that you:
- maintain a record of every gurantee given;
- ensure your legal adviser is aware of all gurantees you have given, particularly those in favour of a company;
- withdraw any guarantees in favour of a company before you sell your shareholding in that company.
If you have any questions about guarantees, please contact a member of the Ayres Legal team on 09 309 3202 or law@ayreslegal.co.nz