Statement of Position: What a Guarantee Can Reach

A personal guarantee is a promise backed by whatever the guarantor owns when it is called. The bank has no claim on any particular asset unless it also takes security; it has a claim against a person, enforced through the courts and, if need be, bankruptcy. Before relying on that claim a lender wants to know what the person owns, what the person owes, and what else is already pledged. The statement of position supplies the first draft of all three.

It is asked of guarantors, of sole traders and partners whose personal and business finances are the same thing, and of the owners of closely held companies whose personal borrowing affects the business. A complete one lists every asset with its owner and value, every debt with its lender and repayments, income from all sources, living costs, and contingent liabilities: guarantees given for others, tax disputes, a partner's business debts. The last category is the one most often left blank.

A lender asks four questions of every asset. Whose is it? An asset owned jointly with someone who has not guaranteed is reachable only to the extent of the guarantor's share, and a creditor enforcing against a share of a family home meets the co-owner's rights; in New Zealand a partner who has not guaranteed may also hold a protected interest in the family home under the Property (Relationships) Act 1976 that ranks ahead of the other partner's unsecured creditors. An asset owned by a trust or a company belongs to that entity, not to the guarantor, however much the guarantor controls it. What is owed against it? Equity, not value, is what a creditor reaches. Can a creditor reach it at all? Retirement savings are largely protected in all three markets: in New Zealand, KiwiSaver funds are protected from a bankrupt's creditors while they stay in the scheme, and other superannuation schemes depend on their trust deeds; in Australia, an interest in a regulated superannuation fund is generally outside the bankrupt's divisible property, though contributions made to defeat creditors can be recovered; in the UK, approved pension arrangements are excluded from the bankruptcy estate, though pension income drawn during the bankruptcy can be claimed. And what will it be worth on the day the guarantee is called? Shares in the borrowing company are worth least exactly then.

The main items are checked, not taken on trust: title searches for property and its ownership, statements for bank and investment accounts, a credit report for undisclosed borrowing and guarantees, and the trust deed or company register where an asset is held through an entity.

The sole director of a fibre-optic cabling contractor in New Zealand, constructed for this page like every figure in it, guarantees the company's US$1.5m of bank facilities. His wife has not guaranteed. His statement of position reads:

The statement is honest and the arithmetic is right; the printed total is still the wrong number for the bank. Three lines that add US$2.5m to the printed net worth contribute nothing a creditor could take: the flat is the trust's, the KiwiSaver is protected, and the shares fail with the company. What remains is half the equity in a home and some personal property, at most about US$650,000 before the costs of enforcing, and in New Zealand possibly less if his wife's protected interest applies, against a guarantee of US$1.5m, with another lender's guarantee claim possibly competing for it. The figures are the example's; a different ownership structure or market would change every line.

The statement of position is a balance sheet of the person: what could be sold. Global cash flow is the person's income statement joined to the businesses': what the owner and the companies earn together and owe together each year. A lender reads both because they answer different risks. A guarantor with large reachable equity and no spare income can meet a call only by selling the house; a guarantor with strong income and few assets can support repayments while the business is weak but has little to give if it fails.

It also differs from security. A guarantee supported by a mortgage over the guarantor's home gives the lender a direct claim on that asset, ranked and registered; a bare guarantee leaves the lender as one of the guarantor's unsecured creditors.

DEFINED IN ONE PARAGRAPH → · PERSONAL GUARANTEES ON BUSINESS LOANS → · LIMITED GUARANTEE →

The statement changes what a lender writes in the credit paper about the guarantee. A guarantee within the guarantor's reach is support the bank can value; one far beyond it is mainly a commitment from the owner, with real value in keeping the owner engaged and little in recovery. Where the gap matters to the decision, the lender may ask for security over the guarantor's interest in the home, in which case a co-owner who signs a mortgage is commonly asked to take independent legal advice, or may limit the guarantee to an amount it can rely on.

It also dates. Assets are sold, refinanced, moved into trusts and given to children; guarantees are given to other lenders. A statement that was accurate at approval says little three years later, which is why a lender asks for it again at annual review and reads changes in ownership as closely as changes in value. A transfer of the home into a trust shortly before a guarantee is called is one of the movements a lender watches for.

THIRD-PARTY MORTGAGE → · SOURCE OF WEALTH →