Q&As

Can a creditor claim in a liquidation where their debt is secured against a third party guarantor's property?

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Published on LexisPSL on 10/03/2021

The following Restructuring & Insolvency Q&A provides comprehensive and up to date legal information covering:

  • Can a creditor claim in a liquidation where their debt is secured against a third party guarantor's property?

Can a creditor claim in a liquidation where their debt is secured against a third party guarantor's property?

A guarantee is an agreement between one person/entity (the guarantor) and another person/entity (the creditor), whereby the guarantor will meet the current or future debts owed by the principal debtor to the creditor to the extent the principal debtor fails to do so. Because guarantees tend to be called on when the debtor is either insolvent, or is in a distressed position, they tend to be seen in insolvency processes frequently and as such there is a vast amount of case law concerning their application and use.

As a matter of general law, the debtor being subject to an insolvency procedure will not affect the creditor's rights against the guarantor—for further information, see Practice Note: The effect of insolvency on guarantees. However, the terms of the guarantee should be reviewed carefully for contractual restrictions.

The creditor would ordinarily have two options available to obtain a recovery of sums due, which can be pursued in parallel: (1) claim against the insolvent debtor, (2) claim against the guarantor. In the case of the

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