Introduction to varying the underlying transaction, release of guarantors and the effect of insolvency on guarantees

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.

Varying the underlying transaction

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.

Releasing guarantors

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.

The effect of insolvency on guarantees

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.