Rights v Creditor

Rights Acquired

The guarantor’s right against the creditor.  The guarantor or guarantor obtains rights against the creditor by reason of the guarantee.  The rights arise at the outset on the signing of the guarantor and are not dependent on the guarantor being enforced.

After the guaranteed debt is due but before it is demanded, the guarantor may require the creditor to call on the principal debtor to pay it off.  The creditor need not sue the principal debtor in advance of suing the guarantor.

The guarantor may be entitled to so require if he deposits the guaranteed debt and indemnifies the creditor in respect of the proceedings against the principal debtor. After the debt is due, the guarantor may pay the creditor and then sue the principal debtor in the creditor’s name or his own name if he attains an assignment of the debt.

In the case of a fidelity guarantee, where the guarantor is aware of the employee’s misconduct, he may require him to dismiss the employee at least under legislation, prior to Unfair Dismissal  legislation.  If the employer has power of dismissal, the guarantor may be discharged from future  liability on the guarantee if the employer fails to comply with the demand in this case.

Set-Off & Marshalling

A guarantor may in proceedings by the creditor on the guarantee set up defences of discharge from liability on equitable grounds. The guarantor on being sued by the creditor, for the payment of the guaranteed debt may use any set-off or counter claim which the principal debtor had available to him.  Where the counterclaim does not directly reduce the debt, the principal debtor may be made a party so as to prevent him from later claiming payment from the creditor.

The guarantor when the payment is demanded by the creditor, may compel the creditor if he has claims on two funds in respect of the guarantee in respect of or one of which the guarantor may avail himself, to resort to the other first.  This is the principle of marshalling.

Where the creditor has security for another debt and can consolidate the security with another held for the guaranteed debt, a guarantor may require that the securities be marshalled in his favour.  Accordingly, when the creditor has been paid in full, the guarantor may be recouped out of the security for the guaranteed debt but also in respect of any deficiency out of other security and may insist where this latter security is sufficient to cover both debts, that the guaranteed debt is paid from it.

Restitution

Money improperly paid by a guarantor in ignorance of certain key may be recovered on general principles of restitution.  This is the principle of mistake, which is narrow and limited. Historically, this did not apply to mistakes of law, but this principle has been modified significantly by the House of Lords.

Subrogation & Security

Once the guarantor has paid the creditor under the guarantee, he is entitled to be subrogated to all rights which the creditor has in relation to the debt.  He may accordingly benefit from securities even if he was not aware of them, which were granted by the debtor, before, at the time of , or after the guarantee.

Where monies are appropriated for a particular purpose, they stand on the same basis as a security if the creditor assigns the debt and securities; This is subject to the obligation to preserve the securities for the benefit of the guarantor.

The right of subrogation in respect of the creditor’s security arises from the obligation of the debtor to indemnify the guarantor.  The courts of equity held it to be inequitable for a creditor to sue under the guarantee but not avail of the securities, thereby casting full liability on the guarantor.

The creditor may not appropriate a security for a guaranteed debt to the payment of another debt or liability.  This is in accordance with general equitable principles of marshalling.  This applies when a creditor may resort to two particular funds of the debtor, where another creditor has a right to one only.  The principle  may require delivery of the securities.

Right to Security

Where the guarantee is for a limited sum only, the common law position is that the guarantor has the rights of the creditor in respect of that amount.  He is entitled to his share in the security.  If however the guarantor relates to a different part of the debt only, he is not so entitled.  These rights are commonly excluded.

If the guarantor (or any person liable with another) for a debt, pays off the debt, he may require that the securities held by the creditor for the debt be assigned to him, notwithstanding that they might otherwise be deemed satisfied.

A guarantor who has paid a disproportionate / inequitable amount of the debt, is entitled to have every security which the creditor possess against the principal creditor assigned. The debt is still deemed to subsist to the extent that the guarantor has been the subject of disproportionate and improper recourse.

The principle applies to joint liability under a contract.  Where they are joint tortfeasors or wrongdoers they may have  recourse against the other under the statute but do not have rights in respect of the underlying securities or to the benefit of a judgment.

Transfer Issues

A guarantor is not entitled to have the benefit of the  assignment of the security until he pays the debt in full.  A guarantor may seek assignment of securities which have been satisfied by action.

The guarantor may obtain damages where the creditor refuses to obtain judgment for the value of the assets which would have been available for execution if the judgment had been assigned.  Where the judgment is assigned, leave must be obtained to execute on foot of it.  The court will take into account the state of accounts between the parties entitled and their mutual rights and obligations at law and in equity.

Prior to transfer of a security to which a guarantor is entitled by having redeemed the debt, he has an equitable right/charge on the property arising by operation of law.  The courts in the UK have found that this is sufficient to protect it by the original registration of the mortgage deed from which the right charge/interest arises.

A guarantor who has mortgaged his own property is a necessary party to a redemption action in respect of a mortgage over another property by the principal debtor, the debt of which is subject to the guarantee.  The guarantor is entitled to redeem the latter,  if he has joined in a mortgage of the property of the principal debtor so as to render himself liable for principal and interest.

He is entitled to redeem if the principal debtor makes a default. Where he redeems the mortgage by the principal debtor, he does so for his own benefit and not for the benefit of the subsequent encumbrancers.  He has no privity with the latter and may take an assignment of the security even though they were created before the guarantee.

If further advances are made which are tacked on to the security and the guarantor is unaware of them, where the guarantor is unaware of the subsequent advances and they were not contemplated at the time of the loan, the guarantee or may avoid liability.

Rights and Second Mortgagee

The right of the guarantor to consolidate is superior to the rights of the second mortgagee.    The guarantor is not entitled against a second mortgagee to tack costs incurred in the context of a guarantor covenant onto the first mortgage, as against the second mortgagee.

The guarantor is entitled to equities which the creditor could have enforced.  They have priority over the debtor and also persons claiming through him and under him.

The above rights may be varied by the terms of the guarantee.  They may be expressly released or varied if the guarantor has an indemnity from the debtor in lieu of rights he might otherwise have.