LexisNexis Practical Guidance®

This guidance note explains the use of director’s guarantees in financing transactions, and answers the question “when and why do lenders require director’s guarantees?”

A corporate borrower often has multiple directors, and it is common for the lender to require a director’s guarantee from each of the directors. This guidance note summarises in table form the basis of the director’s liability to the lender, being joint, several, or joint and several.

Other matters that this guidance note covers include:

• •key considerations for the lender and the director when entering into a director’s guarantee; and
• •tips for legal practitioners when advising directors regarding director’s guarantees.

See Director’s guarantee.

This guidance note explains the use of performance guarantees in financing transactions. References are made to case law to aid legal practitioners’ understanding on a range of relevant matters, including what is the guaranteed obligation, and imposing conditions on a performance guarantee.

This guidance note includes example wording for a performance guarantee that legal practitioners may use.

See Performance guarantee.

This guidance note explains what is a demand guarantee, and the use of demand guarantees in financing transactions. Legal practitioners will also find commentary detailing the parties to a demand guarantee and the roles they play.

This guidance note includes example wording that legal practitioners may come across in a contract where there is a requirement on a party to obtain a demand guarantee.

See Demand guarantee.

This guidance note explains the use of bank guarantees in financing transactions. Legal practitioners will also find commentary detailing the parties to a bank guarantee and the roles they play.

Other matters that this guidance note covers include key considerations for the issuer and the beneficiary of a bank guarantee, and the application of the autonomy principle in the context of a bank guarantee.

See Bank guarantee.

This guidance note explains what is a cross guarantee, parties to a cross guarantee, and whose obligations are guaranteed in a cross guarantee. Among other practical matters, this guidance note also considers cross guarantee in the context of ASIC Corporations (Wholly-owned Companies) Instrument 2016/785.

See Cross guarantee.

This guidance note explains what is a parent company guarantee and the use of parent company guarantees in financing transactions. It also covers key considerations for the lender and the parent company when entering into a parent company guarantee.

This guidance note also outlines important matters for legal practitioners to consider, such as corporate benefit in the context of “downstream” parent company guarantees, and potential tax implications relating to group companies utilising a parent guarantee as a form of credit support for a subsidiary.

See Parent company gurantee.

This guidance note explains what is a standby credit and the use of standby credits in financing transactions. It also explains the background and history of standby credits, for example, standby credits were first developed in the US to satisfy US banking law. Outside of the US, it is more common to use a demand guarantee.

Legal practitioners will find commentary detailing the parties to a standby credit and the roles they play.

This guidance note also outlines the potential application of international standards to standby credits that legal practitioners may come across, including ISP 98 and UCP 600.

See Standby credits as a form of guarantee.

A comfort letter is a written statement of support for a third party. Comfort letters may not be legally binding, however, even where there is a lack of a legal obligation, the provider of a comfort letter may still honor the arrangement for commercial reasons.

This guidance note explains the use of a comfort letter, including that it is quasi-security, and the many different names that such a document may bear. This guidance note contains examples where comfort letters are commonly used in financing transactions, and explains the reasons for their use. Importantly, this guidance note outlines for legal practitioners the typical terms of a comfort letter, and answer the often asked question of “is a comfort letter enforceable?”.

See The use of comfort letters in financing transactions.

Comfort letters may be used as a guarantee alternative, but it is generally accepted that they do not provide the same certainty as a guarantee. This is because it may be arguable as to the nature of any rights that they create, and whether those rights are enforceable.

There is no one rule that determines whether a comfort letter is binding and can create legal obligations. It is therefore very important that legal practitioners draft, review and negotiate any comfort letter with care. This guidance note outlines the relevant matters that a legal practitioner should consider in practice when advising clients on comfort letters.

See Practical considerations relating to comfort letters.

Guarantors are granted various rights and protections. This Guidance Note explains the key rights and protections that legal practitioners need to be aware of in order to provide legal advice to both lenders and guarantors.

See Guarantor rights and protections.

There are many matters that lenders need to carefully consider when dealing with corporate guarantors. These matters are equally important for a corporate guarantor to consider. This Guidance Note outlines the key considerations relevant to corporate guarantors. These include matters relating to corporate capacity, corporate benefit and uncommercial transaction.

See Practical tips for dealing with corporate guarantors.

There are many matters that lenders need to carefully consider when dealing with individual guarantors. These matters are equally important for an individual guarantor to consider. This Guidance Note outlines the key considerations relevant to individual guarantors. These include matters relating to capacity, undue influence and the impact of the death of a guarantor.

See Practical tips for dealing with individual guarantors.

A guarantee may be given by multiple guarantors, or co-guarantors. This Guidance Note outlines the key considerations for both a lender and a co-guarantor including whether or not the co-guarantors’ liability is joint or joint and several and the right to seek contribution from a co-guarantor.

See Practical tips for dealing with co-guarantors.

The Code of Banking Practice (BCOP) sets standards of good banking practice when dealing with individual or small business customers, including prospective customers, and their guarantors. It also contains specific requirements relating to the provision of banking services. The current version of the BCOP is the 2020 version, which commenced on 1 March 2020. The preceding versions of the BCOP were the 2019 version and the 2013 version. The 2019 BCOP and 2013 BCOP remain relevant, as explained in this guidance note.

This guidance note explains the relevance of the BCOP to legal practitioners, and provides some resources for legal practitioners to use.

This guidance note also explains key provisions of the BCOP that relate guarantees. An example of this is that a subscribing bank’s guarantee must contain a statement that the guarantee complies with the BCOP and a prominent warning containing matters prescribed by the BCOP. This guidance note also highlights some matters that legal practitioners should be aware off when advising subscribing banks and guarantors.

See Banking Code of Practice essentials and how it applies to guarantees.

This guidance note provides practical guidance from selected recent case law regarding the operation of the Banking Code of Practice (BCOP) and its application on guarantees:

• •George 218 Pty Ltd v Bank of Queensland Ltd [2015] WASC 434; BC201511125;
• •Doggett v Commonwealth Bank of Australia [2015] VSCA 351; BC201512471;
• •National Australia Bank Ltd v Rose [2016] VSCA 169; BC201605918; and
• •Commonwealth Bank of Australia v Wood [2016] VSC264; BC201605082.

This guidance note also briefly considers Marsden v DCL Developments Pty Ltd (No. 3). This decision again confirms that the BCOP has contractual effect when incorporated by reference in terms and conditions to the applicable financing documents. See Marsden v DCL Developments Pty Ltd (No. 3) [2016] NSWSC 1795.

See Practice guidance from selected case law relating to the Banking Code of Practice and guarantees .

In the context of guarantees, there are many banking and other legislation that may be relevant to legal practitioners. These include the National Consumer Credit Protection Act 2009 (Cth), the Personal Property Securities Act 2009 (Cth), the Privacy Act 1988 (Cth) and the unfair contract terms legislation.

This subtopic considers the relevance of these legislation when legal practitioners draft, review or negotiate guarantees or advise clients regarding guarantees.

The National Credit Code (NCC) is in sch 1 of the National Consumer Credit Protection Act 2009 (Cth). The NCC creates additional requirements for guarantees that are entered into in relation to a credit contract regulated by the NCC. The guarantee will not be enforceable unless these requirements are complied with.

This guidance note provides an overview of the regulation of consumer credit, then explains the specific NCC requirements regarding guarantees, and the rights and protections to the guarantor under the NCC. Importantly, this guidance note explains how “unjust” guarantees can be cancelled by a court.

See National Consumer Credit Protection Act.

Australia’s personal property securities (PPS) reform has resulted in the replacement, or significant modification, of over 80 different federal, state and territory laws by way of the introduction of the Personal Property Securities Act 2009 (Cth) (PPS Act). This guidance note provides an overview of the PPS legal framework, then considers guarantees in the context of the PPS regime. It answers the question “is there a requirement to register guarantees on the PPS Register?”, and explains how a guarantee document may contain a security interest. This guidance note contains examples of PPS Act related definitions and provisions for guarantees to aid legal practitioners’ understanding of the various PPS concepts.

See Personal Property Securities Act.

The Privacy Act 1988 (Cth) (Privacy Act) regulates the handling of personal information about individuals, including natural person guarantors. Personal information includes:

• •sensitive information; and
• •credit information.

This guidance note explains what is personal information, sensitive information and credit information of guarantors. It also explains (among other things) how banks and financial institutions’ may comply with the Privacy Act, the role of the Office of the Australian Information Commissioner in ensuring Privacy Act compliance, and the interaction between the Code of Banking Practice and the Privacy Act.

This guidance note contains examples of wording that relates to individual guarantors in privacy consents, and identifies useful resources for legal practitioners regarding the Privacy Act.

See Privacy Act.

The Australian Consumer Law (ACL) is in sch 2 of the Competition and Consumer Act 2010 (Cth). Part 2–3 of the ACL is titled “unfair contract terms”, and this part forms Australia’s unfair contract terms regime. This guidance note provides an overview of the unfair contract terms regime, and explains key legal concepts, including the meaning of “standard form contract” and what is “unfair” (and examples are provided).

Currently there is very little legal commentary or guidance from regulators regarding the application of the unfair contract terms legislation to guarantees. This guidance note outlines some matters regarding guarantees in the context of the unfair contract terms regime that legal practitioners should consider.

See Unfair contract terms.

This guidance note provides practical tips to assist legal practitioners when drafting, reviewing or negotiating guarantees in the course of advising clients. The practical tips include those relating to:

• •applicable principles for the guarantee to be binding;
• •how to draft a guarantee that will be construed as a deed;
• •reviewing a guarantee’s compliance with the Banking Code of Practice; and
• •drafting effective suspension of right of set-off clauses.

The guidance note also contains a selection of other relevant considerations for drafting, reviewing and negotiating guarantees. Examples from case law are provided to aid legal practitioners’ understanding in terms of applying the practical tips.

See Practical tips for drafting, reviewing and negotiating guarantees in financing transactions.

This guidance note provides some practical tips to assist legal practitioners when drafting indemnity clauses. Example wording is provided to aid legal practitioners’ understanding in terms of applying the practical tips.

The practical tips include those relating to:

• •drafting indemnities to change or expand the position at law; considerations include causation, foreseeability and remoteness;
• •the necessary step of analysing the financing transaction, identifying risk that may arise from the transaction, and listing potential losses that may result as a consequence;
• •how to draft indemnity wording so that the indemnity provisions are as clear as possible to avoid any disputes as to interpretation and construction; and
• •whether to use words and terms such as “make good”, “compensate” and “reimburse” instead of “hold harmless”.

See Practical tips for drafting indemnity clauses.

Legal practitioners can expect clients will need advice on practical matters regarding guarantees. In financing transactions, some practical matters that may arise include:

• •variation of the underlying transaction that a guarantee is connected to;
• •the release of a guarantor from a guarantee, or the release of one or more co-guarantors from a guarantee; and
• •the effect of insolvency on guarantees.

The guidance notes in this subtopic seek to provide practical guidance regarding these matters.

This guidance note explains the “Ankar” principle, which in broad terms, means that a guarantor will be released from a specific guarantee of the due performance of the principal debtor's obligations under a particular contract if the parties vary that contract in a way that is not insubstantial or incapable of prejudicing the guarantor. It then outlines when, in a financing transaction, will there be a variation of the underlying transaction.

This guidance note goes on to explain when the underlying agreement to a guarantee is amended, unless the guarantor has given prior consent to the variation, then the guarantee may be discharged, and the guarantor may be released. This means guarantor’s consent is essential, and this is illustrated by examples in selected case law. Example of wording that may be used when seeking a guarantor’s consent is also provided for legal practitioners’ reference.

See Varying the underlying transaction.

In some circumstances, a guarantor may be released as the guarantee is discharged by operation of law. The release of a guarantor from the guarantor’s obligations may be in whole or in part. This guidance note explains circumstances where this may occur. Case law examples are provided to aid legal practitioners’ understanding.

This guidance note explains how indemnity may be used as a protection when a guarantee is discharged. It also outlines ways to prevent guarantors from being released unexpectedly.

See Release of guarantors.

Guarantees are a key mechanism for creditors to obtain comfort for any indebtedness due to it from the debtor, particularly when there are concerns over the debtor's long-term solvency.

This guidance note explains that generally, if the guarantor has granted a guarantee for the borrower’s debt to the lender, and the borrower becomes insolvent, the liquidation of the borrower does not adversely affect the lender’s right to enforce the guarantee so granted. It also explains the operation of selected provisions of the Corporations Act 2001 (Cth) in the context of the impact of insolvency on guarantees.

See The effect of insolvency on guarantees.