What is a guarantee?

A guarantee is an agreement between one person/entity (the guarantor) and another person/entity (the creditor), whereby the guarantor agrees to answer for the liability of another party (the principal).

For a guarantee to be valid, it must be evidenced in writing and signed by the guarantor, or any agent empowered to do so.

Why are guarantees relevant to insolvency?

Guarantees are an important mechanism for a creditor to obtain comfort for any indebtedness due to it from the debtor, where there are concerns over the debtor's long term solvency. They are commonly used by:

1. •

   banks who lend to companies and require guarantees from other parties such as group companies or company directors

2. •

   landlords who often obtain guarantees from the tenant company's parent company or one or more directors

3. •

   factoring companies

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