The most important thing to realise about guarantees is that
when it comes to payment, the liability of the guarantor will
include the unpaid principal and interest which continues to accrue
at a compound rate of interest.
Compounding of interest means that interest is added to
principal annually and interest continues to accrue on the sum of
both. Over time, the result of compounding of interest means that
the amount of interest owing may well exceed by several times the
original amount of the loan.
The longer the loan remains unpaid, the greater the effect of
compounding and the greater the liability of the guarantor, which
continues to grow at a compound rate until discharged.
It is usual for banks lending to developer borrowers to request
personal guarantees from the personal owners of the development
This practice is widespread and is regarded as "additional
security" for the loan and has several attractions to lending
banks. Firstly, the personal guarantor becomes a mark for repayment
of the loan. Secondly, it ties the guarantor into personally
managing the affairs of the borrower so as to limit his credit
exposure to the Bank. And, thirdly, it helps to secure the
Bank's ability to trace realised profits from the underlying
commercial transaction in the hands of the personal guarantor.
The value of a personal guarantee is directly related to the net
worth of the individual who has agreed to give the guarantee and so
the law requires particular formalities to be observed by the
person giving a guarantee so as to impress the personal nature of
the obligation incurred by providing a guarantee.
ENFORCEMENT OF A JUDGMENT
To recover under a guarantee, a bank must first obtain judgment.
However, it is one thing to have indebtedness declared by the
court; it is another thing entirely to recover money from the
judgement debtor. It can often be the case that on securing
judgment, it is discovered that the judgment debtor has no
available assets under his control against which the judgment debts
may be enforced.
There are a number of enforcement procedures open to banks and
the available options include:
Registration of a judgment - the bank can register the judgment
in the High Court. Upon registration, it will generally be listed
in any judgment search which is carried out against the individual
and recorded in such publications as Experian Gazette.
Seizure by the sheriff - upon lodging the appropriate
documentation in the...