How are guarantees regulated under the National Credit Code?
The National Credit Code (the “Code”) regulates guarantees which secure obligations under a credit contract regulated by the Code where the guarantor is a natural person or strata corporation. If a guarantee also guarantees obligations other than those under a regulated credit contract, the Code is only applicable to the guarantee to the extent that it relates to the obligations under the regulated credit contract.
When a guarantee is not enforceable
Under the Code, a guarantee will not be enforceable unless:
it is in writing;
it is signed by the guarantor; and
it contains a warning in the form set out in Form 8 of the National Consumer Credit Protection Regulations 2010 (Cth) (the “Regulations”) and the warning is set out immediately above, and on the same page as, each place the guarantor is to sign the guarantee.
Pre-signing requirements
Before a guarantee is signed by a guarantor, the credit provider is required to give the prospective guarantor a copy of the credit contract document or proposed credit contract and a document in the form set out in Form 9 of the Regulations, which explains the rights and obligations of the guarantor.
Post-signing requirement
After a guarantee is signed, the credit provider has 14 days to provide the guarantor with a copy of the guarantee and credit contract or proposed credit contract, unless they have already been provided with a copy of those documents.
Withdrawing from a guarantee
A guarantor may withdraw from the guarantee at any time before credit is provided under the credit contract, or after credit is first provided if the credit contract differs materially from the proposed credit contract provided to the guarantor before the guarantee was signed.
Increasing a guarantor’s liabilities
In cases where a credit contract is amended to increase or to allow for an increase in liabilities (such as an extension of credit limit), the existing guarantee will not secure the additional liabilities under the amended credit contract unless the credit provider gives the guarantor written notice of the changes made to the terms of the credit contract, and the guarantor provides the credit provider with a written acceptance of the extension of the guarantee to secure the increased liabilities.
Limits on liability
The Code also limits a guarantor’s liability in several ways:
a guarantee is void where it secures an amount that exceeds the total sum of the debtor’s liability under the credit contract and the reasonable expenses of enforcing the guarantee (or any lesser amount agreed by the credit provider and the guarantor). However, this rule does not prevent credit providers from enforcing a guarantee relating to liabilities under a credit contract that is unenforceable solely because of the debtor’s death, insolvency or incapacity;
if a debtor was less than 18 years old when the liability was incurred, a guarantee cannot be enforced against the guarantor unless it contains a prominent statement to the effect that the guarantor may not be entitled to an indemnity against the debtor;
guarantors are permitted to limit liabilities under a continuing credit contract; and
a guarantee is void to the extent that it limits the guarantor’s right to indemnity from the person whose liability is secured under the guarantee. This means that guarantors must have an unrestricted right to claim indemnity from the principal debtor.
Changes
Part 4 of the Code regulates changes to obligations under a guarantee, including unilateral changes that a creditor may make, changes by mutual agreement, changes on grounds of hardship and unjust transactions.
Enforcing a guarantee
The Code includes requirements which a credit provider must meet before it can enforce a guarantee. A credit provider cannot enforce a guarantee against a guarantor once it has obtained a judgment from the court against the debtor, unless:
the debtor fails to pay within 30 days after the credit provider has made a written demand for payment of the amount under the judgment; or
the court has relieved the credit provider from the obligation to obtain judgment against the debtor on the ground that recovery from the debtor is unlikely; or
the credit provider has made reasonable attempts to locate the debtor but without success; or
the debtor is insolvent.