By: IGECHI ICHEGBO ESQ.

INTRODUCTION

Loans are generally secured or collateralized by assets which include floating and fixed assets, shares of the company, cash in bank, and in some cases personal guarantee of individuals. In several circumstances, the borrower might non have enough avails or any collateral for the loan. Information technology is on such occasions that such the borrower is compelled to bring in a third party who tin can stand or apply his avails to secure the loan facility. Such persons are referred to as "Third Party Guarantor". The contract binding the borrower, the lender and the guarantor is generally chosen "Contract of Guarantee" or "Unconditional Personal Guarantee and Indemnity"

 This commodity expounds on the responsibilities of a guarantor, the risks involved and how to protect guarantors' rights and interests in loan transactions.

DEFINITION OF TERMS

A. Guarantee:

A proper definition of Guarantee is an undertaking to answer for the payment or performance of another person'southward debt or obligation, in the result of default by the person primarily responsible for information technology. This definition of guarantee has gotten a judicial backing as elucidated in the case of Chanmi five. U.B.A Plc {2010}  half-dozen NWLR {Pt. 1191} 474 at 478 Ratio ane , where the Supreme Court of Nigeria defined a guarantee thus:

"Guarantee has been defined every bit a written undertaking made by one person to another to be responsible to the other if a third person fails to perform a sure duty, e.grand. payment of debt…"

Black's Police Dictionary 7 th Edition at folio 711 defined Guarantee as "an assurance that a contract or legal act will be duly carried out."

B. Guarantor:

According to the Black's Law Dictionary 7 thursday Edition page 711 , a guarantor is divers as "one who gives security for a debt."

A guarantor'south liability does non begin until the principal debtor is in default. Furthermore, a guarantor is a term used to describe an individual who promises to pay a borrower's debt in the result that the borrower defaults on his loan obligation by pledging his assets as collateral confronting the loan.

Creation OF GUARANTEE

A contract of guarantee creates some rights and liabilities between the lender and the guarantor. It is often created in several ways which are all recognised nether our laws. A guarantee may arise past whatsoever of the following means:

  1. Tripartite Act of Legal Mortgage: It is a legal certificate in which the guarantor who is the mortgagor transfers his interest in assets to the mortgagee/creditor for the purpose of securing a loan given to the Borrower. Once there is an understanding between the parties mentioned above, a tripartite legal mortgage has been created. A standard tripartite legal mortgage involves the mortgagee (lender), mortgagor (guarantor), and the borrower of the loan.
  2. Human activity of All Assets Debenture: This is a accuse over the entirety of a visitor'south assets in favour of a lender or creditor transferring the temporary interest to the lender/creditor. The deed of all asset debenture tin can only be discharged upon the final liquidation of the loan availed to the borrower or debtors as the instance may be.
  3. Surrender of Shares: A guarantor may undertake to relinquish his shares, to serve equally security/collateral for the loan in the event the borrower fails to liquidate his debts.
  4. Post-dated Cheques: This is a situation where a guarantor undertakes the liability of a debtor, past issuing mail service-dated cheques in favour of the creditor to liquidate total or a part of the loan that was granted to the debtor in event of default.

GUARANTORS LIABILITY TO THE CREDITOR

1. Crystallization of Liability upon Borrower'south Default:

The guarantor to a facility automatically becomes liable to the creditor upon the default by the borrower, and information technology is well established that failure of the borrower to liquidate the facility as agreed crystallizes the correct of the creditor confronting the third person guarantor. In the example of C.B.N v Interstella Comm. Ltd. {2018} 7 NWLR {Pt.1618} Folio 294 at 308, the Supreme Courtroom of Nigeria held that;

"A guarantor is technically a debtor because where the chief debtor fails to pay his debt, the guarantor will be chosen upon to pay the coin owed. However, the fact that the obligations of the guarantor ascend just when the main debtor has defaulted in his obligations to the creditor does not mean that the creditor has to demand payment from the principal debtor or from the guarantor or give find to the guarantor earlier the creditor can go on against the guarantor, nor does the creditor have to commence proceedings whether criminal or ceremonious, against the principal debtor unless in that location is an express term in the contract requiring him to do then."

Furthermore, the liability of the guarantor crystallizes the moment a default occurs on the part of the borrower as seen in the Supreme Court decision in Fortune International Bank Plc v. Pegasus Trading Office (GMBH) &2 Ors (2004) 4 NWLR (Pt. 863) page 369 at 389 Para D-E thus:

"The fact that the obligation of a guarantor arises only when the principal has defaulted in his obligations to the creditor does non mean that the creditor has to demand payment from the principal or from the surety or give notice to the surety. Nor does he take to commence proceedings against the principal, whether civil or criminal unless there is an express term in the contract requiring him to do so."

2. Guarantee Creates A Carve up Contract Between The Guarantor And The Creditor:

Upon the execution of a contract of guarantee, there exists a separate contract betwixt the creditor and the guarantor, which can exist enforced by the creditor when there is a breach without recourse to the borrower, who is the main debtor. Thus this is as expressed emphatically in the case of UBA Plc v Chami (supra) Folio 479 Ratio ii where the Courtroom held as follows;

"Where a person personally guarantees the liability of a tertiary political party by entering into a contract of guarantee or suretyship, a distinct and divide contract from the principal debtor's is thereby created between the guarantor and the creditor."

3. Guarantor's Direct Liability To A Creditor:

Information technology is pertinent to country that once a debt has accrued and a guarantee has been called upon by the creditor, the guarantor becomes directly liable to the creditor independent of the borrower's liability to the creditor. The creditor tin can choose to proceed to recover the loan from the guarantor without approaching the principal debtor.

A guarantor is directly liable to liquidate the debt of the principal borrower, in the event that the principal borrower defaults or refuses to accolade his repayment obligation. In fact, it is of no moment whether or non the guarantor benefited from the loan granted to the principal borrower; information technology is sufficient that there exist a guarantee from the guarantor and the principal borrower has defaulted in his repayment obligation. In the case of Crown Flour Mills Ltd v Olokun (2008) 4 NWLR at folio 298 Para F-H the Court held thus:

"…….in a contract of guarantee, the police has moved to the eye to make right of the creditor to and then proceed against the guarantor less provisional….. a creditor is entitled to proceed against the guarantor without or contained of the default of the principal debtor."

foreign judgment

As well in UBA Plc v Chami (supra) page 479, Ratio three & iv , the Court held that:

"A contract of guarantee tin can be enforced against the guarantor directly or independently without the necessity of joining the principal debtor in the proceedings to enforce the guarantee. Thus, a surety may be proceeded against without demand from him and without first proceeding against the primary debtor…when the principal debtor fails to pay his debt, as in the instant example, the liability of the guarantor under the guaranty crystallises. The right of the creditor is therefore non conditional every bit he is entitled to proceed against the guarantor without or independent of the incident of the default of the main debtor."

STEPS A GUARANTOR MUST Have TO PROTECT HIS RIGHTS IN A CONTRACT OF GUARANTEE

It is appropriate for every guarantor to have certain steps then as to protect himself to reduce the hazard of standing as a guarantor. As earlier discussed, there are a number of risks associated with the role of a guarantor, information technology is only proper that we have a second look and consider the factors to look out for before a person can accept existence a guarantor to a prospective borrower, these factors are listed below:

  1. How does the borrower intend to repay the loan granted to him? A guarantor has the responsibility to conduct a background check or comport out a feasibility report of borrower's project with respect to the projects or business to which the borrower intends to utilize the loan, so every bit to determine how the borrower intends to liquidate the loan.
  2. What borrower's asset is available to indemnify the guarantor in example of whatsoever default in the loan and the guarantor is obliged to repay the creditor's loan? The Guarantor has a responsibleness to assess or value the borrower's assets available to indemnify him where the borrower defaults in the loan and the guarantor is obliged to repay the creditor's loan. Furthermore, the guarantor must have proper steps to ensure that the borrower'southward assets available to indemnify him are not encumbered or not fastened to any legal issue that will frustrate the guarantor.
  3. Whether the guarantee is for a fixed corporeality or unabridged loans granted to the borrower by the creditor? The guarantor is advised to properly examine the loan documents or contract then as to ascertain the extent of his liability. Where the guarantee is for a fixed corporeality without interest, the guarantor is liable to the creditor just to the extent of his guarantee without existence liable for accrued interest, but where the guarantee is for the entire loan granted to the borrower, the guarantor is liable to pay the entire loan sum where the borrower defaults.
  4. In the event of a default on the side of the main debtor, does the guarantor have the financial chapters to undertake the liabilities guaranteed against? The guarantor bated from pledging his immovable assets for the discharge of his obligation nether the loan system, the guarantor must be able to define that he has the financial capacity to liquidate the borrower's debt in the event of the borrower'due south default without losing his immovable assets in the discharge of his guarantee obligation.
  5. What nugget does the guarantor intend to put up as security or collateral? The guarantor must diligently identify the assets {floating or fixed} which he intends to nominate as security/collateral for the borrower'southward loan. The assets so identified must exist such that tin adequately discharge his obligation every bit the guarantor nether the loan agreement.

Means A GUARANTOR Tin can SHIELD HIMSELF FROM UNNECESSARY LIABILITIES.

  1. Right to Discharge: A guarantor's obligation to liquidate the debt of the primary debtor co-exists with the beingness of the debt. Hence where the main debtor has completely liquidated his debt or where the guarantor steps into the shoes of the primary debtor to liquidate the debt, he is discharged from the Guarantee or he tin can immediately liquidate the debt earlier interest accrues and somewhen escalate the debt.
  2. Right to Limited Undertaking and Liability: The guarantor's right to liquidate the principal debtor's indebtedness only to the extent of his undertaking. Where a guarantor's undertaking is limited to a certain sum of money, he is under a legal obligation to belch the guarantee only to the extent of his undertaking. Hence the creditor cannot recover from the guarantor whatever sum across the guarantor'south undertaking. For example, a guarantor can exclude/insist on the non-payment of the debt interest save for the verbal money loaned or a specific sum.
  3. Correct to Set-Off: A guarantor has the inherent right to a set-off where there is a corresponding or mutual responsibleness between the guarantor and the creditor. Therefore, where the creditor is also indebted to the guarantor, the guarantor can exercise his right to prepare-off his liability against the creditor's liability to him.
  4. Right to Proper Account on Proceeds of Sale: In the outcome that the guarantor's asset is disposed of in the repayment of the principal debtor's obligation, the guarantor has the right to need a detailed account on the proceeds of the sale so equally to ensure that the avails were sold at the all-time market price. Consequently, he has a correct to asking a refund where the nugget sold is more than sufficient to completely liquidate the chief debtor's indebtedness.

PROTECTION OF A GUARANTOR

The obligation of becoming a guarantor simply implies that he volition be liable for the repayment of the loan in event of default by the debtor to liquidate his indebtedness. In almost cases, the guarantor suffers a great deal. In order to avoid this, the guarantor must accept steps to forestall or protect himself even when he has consented to a guarantee contract.

The post-obit are ways a guarantor can ensure the protection of his interest in a loan transaction;

  1. Reduce Liability: A guarantor should e'er endeavor to reduce equally much as possible to the amount guaranteed in the contract of guarantee, and then as to have a limit to the guarantee. This would ensure that the guarantor accepts liabilities within his ways.
  2. Personal Scrutiny and Execution of Documents: A guarantor should make sure the loan agreement and all other relevant documents relating to the loan granted to the borrower are personally and properly scrutinized by him. Likewise, a lawyer should review aforementioned or an adept in the field for the purpose of the loan. The guarantor should also make sure he has copies of all relevant documentation and confirm all necessary information near the credit/loan understanding. This is to ensure an informed decision to guarantee a loan granted to a borrower.
  3. Acquit out Background Checks: A guarantor should carry out a thorough background check on the purpose of the loan and the well-nigh chiefly the change-ego of the company or entity he is standing guarantee for, in order to exist certain that he is a person of reputable character and the power of the borrower to utilize the loan for the purpose for which it was given.
  4. Ensure Good Relationship with the Borrower: There is need for a prospective guarantor to access his relationship with the borrower to avoid a situation where the borrower cannot be located by either the creditor or the guarantor when the loan crystallizes into indebtedness. This is of import because the guarantor as well reserves the right to proceed against the chief debtor upon the discharge of the indebtedness to the creditor. There is a need for a guarantor to guarantee a loan granted to a person with close proximity to the guarantor.
  5. Skilful Synergy between the Borrower and the Guarantor: It is essential to get through the terms of the understanding in detail and discuss it with the borrower and so equally to avert future complications. This will farther strengthen the resolve of the guarantor towards making a decision to enter into a guarantee contract.
  6. Co-Signatory to the Loan Account: The guarantor must also request that he is a co-signatory to the loan business relationship and so as to help regulate and monitor the account. This is important because the guarantor can supervise the usage of the loan and ensure same is not diverted for other purposes asides from the reason it was granted.

TERMINATION OF A GUARANTEE

There are instances where a guarantor may cull to exercise his right to stop the contract of guarantee. This calls for concern when fraud is detected, misappropriated or for other personal reasons.

It must be borne in mind that it is very difficult to finish a contract of guarantee, especially when the borrower has already taken do good of the loan and expended the money for other purposes. In such instance, a creditor will never let, consent or approve the termination of the contract of guarantee, except the loan has been fully repaid or a replacement is produced and certified to be in the aforementioned standard with the outgoing guarantor because a creditor must be placed in the position as at when the contract of guarantee was executed. However, below are factors that can lead to the request for termination of a contract of guarantee.

  1. Misappropriation of the Loan: A guarantor may end the guarantee contract where the principal debtor misappropriates the credit for other purposes other than for which the credit was granted to the cognition of the creditor. For Example: where a borrower obtains a loan granted to him for business purposes but decides to straight same to seek political elections; in such a circumstance, the guarantor is obliged to bring same to the detect of the creditor and demand for a release of the obligation in the guarantee, later on the guarantor must have ensured a replacement of the guarantor or the loan has been repaid till date.
  2. Misrepresentation and diversion of loan: Where the guarantor was deceived into entering a guarantee contract, such a contract may be vitiated on the ground of misrepresentation and fraud. This is usually applicative where the guarantor is shielded from certain clauses or arrangements in the loan understanding.  where such is discovered by the guarantor, the guarantee understanding ought to be terminated, just before this can utilize, information technology must be proven that the creditor is aware.
  3. Coercive Consent: Where the guarantor is coerced or induced into giving consent to guarantee a loan on behalf of a borrower, information technology vitiates the guarantee. Where the consent of the Guarantor was obtained by duress, the guarantor may terminate the guarantee contract on such basis. This would apply specially where there is proof that the creditor is culpable in the inducement or duress.
  4. Fraud: Where a guarantor's assent to a guarantee has been procured by fraud by the person to whom it is given and in that location is proof to that effect, there is no binding contract. Fraud in this context may consist of suppression, concealment or amending of the contract without the cognition of the guarantor.

CONCLUSION

Conclusively, being a guarantor should not be taken as a mere formality because it is a delivery that he is liable to the creditor, upon failure of the debtor to perform his obligation. The guarantor should be willing to perform his obligation, as the failure to exercise so could amount to the creditor taking upwardly recovery actions against him. In such an upshot, a guarantor who has taken all precautionary steps as suggested in this article tin can invoke any of the options stated above to seek redress against the debtor and belch his liabilities. Finally, a person should never stand as a guarantor to an entity, company or persons non well known, because it is every bit unsafe as the unabridged loan itself.