Guarantees

Contributed by Elizabeth Samra, Consumer Law Centre of the ACT and current to May 2018

A guarantee is a binding agreement involving the credit provider, the debtor and the guarantor. A guarantor is a person who agrees to make credit repayments on behalf of a debtor if they refuse or are unable to do so. A guarantor is entitled to request and receive the same information the debtor is entitled to during the contract term.

A guarantee is not enforceable under the credit law unless:

• it is in writing signed by the guarantor or if a guarantee is contained in a mortgage signed by the guarantor (s 55 NCC); and
• before the guarantee is signed, the credit provider gave the prospective guarantor a copy of the proposed credit contract and a document explaining the rights and obligations of a guarantor as prescribed in the NCCP Regs (s 56 NCC).

A guarantee is void to the extent it:

• secures an amount that exceeds the debtor’s liabilities under the credit contract and the reasonable expenses to enforce the guarantee (s 60(1) NCC); or
• limits the guarantor’s rights to indemnity from the debtor (s 60(5) NCC).

A credit provider is unable to enforce judgment against a guarantor unless:

• the credit provider has obtained judgment against the debtor, and has made a written demand for payment and at least 30 days have lapsed without payment of the debt; or
• the court has order otherwise (s 90 NCC).

The Code of Banking Practice contains additional protections for people who are, or may become, guarantors.

A co-borrower has fewer rights than a guarantor even though they are jointly and severally liable for the credit from the outset and can be sued with or without the other co-borrower(s) if there is a default on repayments. Unlike a guarantor, a co-borrower shares the benefit of the loan. A person who signs as a co-borrower but is really a guarantor, that is, they share no direct benefit from the loan, may be able to avoid liability. A person in such a position should seek legal advice immediately.