Guarantees are a common way in which lenders seek to protect themselves from the risk of debt default. Lenders will often seek a guarantee if they have doubts about a borrower's ability to fulfil its obligations under a loan agreement or other financing arrangement. A guarantor takes on a serious financial risk in providing a guarantee. Accordingly, it is important that a guarantor and its directors are aware of, and have fully and properly considered, all the implications of providing a guarantee, including the corporate benefit accruing to the guarantor.
The recent case of Bass Jarrington Ltd v Royal Bank of Scotland Plc again raised the spectre of guarantees failing on the grounds of lack of corporate benefit and contains some interesting observations about the ability of a beneficiary of a guarantee to enforce it. The case also serves as an interesting reminder of the importance for a director to act in the best interests of his company.
Stevens & Bolton’s head of banking and finance, Jonathan Porteous, suggests some “golden rules” for lenders taking guarantees, in light of Bass Jarrington and other case law, in a recent article featured in Butterworths Journal of International Banking and Financial Law.