In short
A guarantee and indemnity is a separate promise from a director, related company or third party to answer for a borrower's debt if the borrower doesn't pay. Drafted for the lender, it needs to combine a guarantee (a promise conditional on the borrower's default) with an indemnity (a standalone obligation that survives even if the underlying loan is technically unenforceable), and it needs the procedural protections courts expect before enforcing it against an individual guarantor.
Why guarantee and indemnity are drafted together
A guarantee alone is a promise to answer for someone else's debt, which means it can be defeated by technical defects in the underlying loan — if the facility agreement turns out to be unenforceable for some unrelated reason, a pure guarantee can fall with it. An indemnity is a separate and independent promise to compensate the lender for loss, which survives even if the underlying debt is set aside. Lender-side guarantees are drafted as guarantee and indemnity documents precisely so the lender isn't left exposed by a defect in a different document.
Who actually needs to be a guarantor
For company borrowers with limited assets, directors' personal guarantees, or a guarantee from a related trading entity, give the lender recourse beyond the borrower itself. We advise on which structure — personal, corporate, or both — actually improves the lender's recovery position, because a guarantee from an entity with no assets is not meaningfully better than no guarantee at all, and adds documentation cost without adding real security.
Independent legal advice and unconscionable conduct
Courts have repeatedly set aside guarantees given by spouses, family members and other financially unsophisticated guarantors where the lender knew or should have known the guarantor didn't understand what they were signing, or was under emotional or financial pressure from the borrower. We build independent legal and, where relevant, independent financial advice certificates into the execution process as standard, because it's the clearest evidence a lender can produce that the transaction wasn't unconscionable within the meaning the courts have developed under the general law and the Australian Consumer Law.
Continuing guarantee and scope
We draft the guarantee as a continuing security covering the present facility and any future increase, extension or refinance, so the lender isn't left needing a fresh guarantee every time the facility is varied. At the same time, the guarantor needs a clear and genuine understanding of that scope at the point of signing — an unlimited, open-ended guarantee signed without proper explanation is exactly the kind of term that invites later challenge.
Enforcement and limits on liability
The deed sets out how a demand is made on the guarantor, what evidence of the underlying debt is required, and whether the guarantor's liability is capped at a fixed amount or unlimited. We also address subrogation — the guarantor's right, once they've paid, to step into the lender's shoes against the borrower and any security — so the guarantor's post-payment position is clear from the outset rather than argued about after the event.
What the fixed fee covers
- Guarantee and indemnity deed drafted for the lender
- Advice on which entities or individuals should be guarantors
- Independent legal advice certificate process for individual guarantors
- Continuing guarantee drafting covering future variations
- Demand and enforcement mechanics, including any liability cap
Mistakes we see
- Taking a guarantee alone without an indemnity, leaving the lender exposed if the underlying loan is defective
- No independent legal advice certificate, risking the guarantee being set aside for unconscionable conduct
- Guarantee from a corporate entity with no real assets, adding cost without improving recovery
- Guarantee drafted as a one-off obligation that lapses on the first refinance or variation
- No clarity on liability cap, creating disputes about the guarantor's maximum exposure
Who this is for
- Private and institutional lenders requiring director or third-party support
- Non-bank financiers lending to thinly capitalised corporate borrowers
- Landlords requiring a guarantee behind a commercial lease
- Trade creditors extending credit terms to corporate customers
Frequently asked questions
- Why does the document combine a guarantee and an indemnity?
- The guarantee gives the lender a claim conditional on the borrower's default; the indemnity gives an independent claim that survives even if the underlying loan is unenforceable for an unrelated reason. Together they give the lender the broadest possible recovery position.
- Is independent legal advice legally required for a guarantor?
- It isn't mandated by a single statute in every case, but it's the standard courts apply when deciding whether a guarantee was procured unconscionably, particularly for spouses and other non-commercial guarantors. We treat it as essential, not optional.
- Can a guarantee cover future increases to the loan?
- Yes, if it's drafted as a continuing guarantee. We make sure the guarantor genuinely understands and accepts that scope at signing, because an overly broad guarantee signed without explanation is more vulnerable to later challenge.
- What is subrogation and why does it matter to the guarantor?
- Once a guarantor pays out under a guarantee, subrogation gives them the right to step into the lender's position and pursue the borrower, including under any security the lender held. We document this clearly so it isn't disputed after payment.
- Can a guarantor's liability be capped?
- Yes, and it's common for a guarantee to be limited to a fixed sum rather than the full facility amount, particularly where multiple guarantors are sharing exposure. We negotiate and document the cap as part of the deed.
Related