Your Rights as a Guarantor When the Principal Borrower Defaults

Guarantors are often surprised by how quickly a lender can turn to them once the principal borrower defaults. Understanding the actual legal position, rather than assumptions about how guarantees work, matters both for guarantors facing a claim and for anyone considering standing as one.

Liability Can Arise Without the Lender Suing the Borrower First

In most standard guarantee arrangements, the guarantor's liability is co-extensive with the borrower's, meaning the lender is not obliged to exhaust remedies against the borrower before pursuing the guarantor, unless the specific guarantee document says otherwise.

The Right to Notice

A guarantor is generally entitled to be informed of enforcement action affecting their liability, and any security they have personally provided is subject to the same SARFAESI notice requirements as the borrower's own security.

Discharge of the Guarantee

A guarantor's liability can be discharged, in whole or part, where the lender materially alters the terms of the loan without the guarantor's consent, or takes actions that prejudice the guarantor's rights against the borrower, such as releasing security without agreement. These are technical defences that require careful factual and documentary support.

The Right to Subrogation

Once a guarantor pays the guaranteed debt, they step into the lender's position and acquire the right to recover that amount from the borrower, including, where applicable, the benefit of any security the borrower had provided.

Personal Guarantor Insolvency

Following amendments extending insolvency proceedings to personal guarantors, a guarantor facing a large claim may also find themselves subject to insolvency resolution, a route with its own process and consequences distinct from a simple civil claim.

What a Guarantor Should Do

Anyone who has stood as a guarantor and receives notice of a claim should review the original guarantee document carefully, note any changes to the loan made after the guarantee was signed, and seek legal advice before assuming the full claimed amount is automatically enforceable.