“GUARANTEES.”

Hawera Star, Volume XLVIII, 6 September 1924, Page 3

“GUARANTEES.”

LECTURE BY MR. F. C. SPRATT.

The following is an abridgement of a lecture on ‘‘Guarantees” delivered by Mr. F. C. Spratt, LL.B., at the last meeting of the Hay-era Accountancy Students’ Society:

“The subject of Guarantees is one of interest to accountants, who in their work in connection with assigned' estates, administration of deceased persons’ estates, bankruptcy work, liquidation of companies, formation and dissolution of partnerships, have often to consider the legal and practical effects of A guarantee might be described as a contract whereby one person (known as the surety or guarantor) promised another person (known, as the to be answerable in the event of a third person (known as; the principal debtor) making default in respect of a liability incurred or -to* be incurred by such third person to the creditor. Guarantees are a familiar thing in Taranaki business life. They are at present in bad odour, and many people are of opinion that the day of guarantees is 'at an end; hut guarantees had their place in business relations, and there were many cases where it was not only proper, but necessary, that contracts of guarantee should be entered into. For example, in the case of a private company, where the creditor required that the principal shareholders should guarantee the performance of the contracts of the company of which they h.acl the. management, and in respect of whose profits they would benefit. Another instance was in the case of husband and wife, where the wife gave security over her own property, but by reason of the particular relationship between husband and wife, and the possibility of the wife’s being a “dummy” for the husband, the lender required ■’ that the wife’s contract for repayment of the money should be guaranteed by the husband. Then, again, when a person was borrowing money from such an impersonal being as a bank or other lending institution, the banker, although considering the personal stand ing of the borrower, yet required that the advance should be guaranteed by some third person. Another instance, and one with which we are familiar in Taranaki, was the guarantees given to support the banking contracts of cooperative dairy companies, where the chief concern of the company and of its shareholders was not tlje building up of reserves, but the distribution to as full an extent as possible of profits and the tying up of as little capital as possible. In such cases the shareholders entered into guarantees of different kinds. •

“Where guarantees were - entered into by more than one person they were of three kinds: Joint, several, and joint and several. The joint guarantee meant that all the guarantors were liable for the amount of the guaranteed debt, and that the creditor, in making demand or .enforcing payment, must proceed against all of the guarantors, and could not pick out . any one; guarantor. ’T;he several guarantee meant that each guarantor was. liable only for a. definite proportion of the amount of the guarantee, and that the creditor was at liberty to proceed against any or all of. the guarantors, hut only to the extent of the definite liability of each guarantor. This kind of guarantee was sometimes entered into by members, of dairy companies, who guaranteed an amount, proportionate to the amount of their respective shareholdings in the company. The third class of guarantee, the joint and several, was the one with which we were most familiar in Taranaki. It meant that each of the guarantors was liable both jointly with the others for the whole of the debt, and also separately and personally for the whole of the debt, so that the creditor, in the enforcement of the guarantee, could proceed at his pleasure against the whole of the guarantors or against some, or even one, only, of the guarantors for the whole amount of the debt. “It should he remembered that a guarantee was a particular form of contract, and that the ordinary rules of law relating to contracts applied to contracts of guarantee. Among the most important were the rules that every guarantee must be supported by consideration unless the guarantee was in the form of a deed, and that the parties must be of full capacity—for instance, a guarantee by an infant was void, or a guarantee ultra vires of a company was void—and further that contracts of guarantee were voidable for the same reason as ordinary contracts, namely; by reason of the existence of fraud, duress, or illegality of object. There were, however, special rules relating to contracts of guarantee. The Statute of Frauds required that every guarantee should be in writing, to be signed by or on behalf of the party to be charged therewith. This meant that every material term of a guarantee must be incorporated in the writing, and if any material term of the guarantee wej’e left out the contract would be unenforceable. At one time it was held that this required the consideration supporting the guarantee to appear in the writing. Many contracts were by reason of this requirement invalidated, because thief consideration, such as an agreement to give time, being somewhat unsubstantial, was not. mentioned, in the guarantee. To remedy this an A,ct of Parliament was passed, and: now the consideration need not he shown in the guarantee, hut it was important to remember that there must be consideration, and good consideration ; otherwise the guarantee would be of no effect.” An important rule relating to guarantees was that they were contracts in which the utmost good faith must he shown by the creditor. The surety was entitled to be truly informed of the real nature of the transaction between the creditor and the principal debtor in respect of which he promised to be liable. If the creditor misrepresented or fraudulently concealed from, the guarantor before or at the time of his promise any material part of the transaction, the guarantee was void. This also applied to subsequent dealing where the guarantee was a continuing guarantee. Another rule was that in order that the liabilitv of the surety might arise, any conditions precedent must be observed. For-instance, if the advance was' stipulated to be made in a. particular wav, the advance must be made in that way and no other. Guarantees were known as either single or continuing guarantees. A single guarantee was where the guarantee applied to a single transaction, and a continuing guarantee was one which applied to a. number of transactions of the kind specified, such as a. series of advances by a banker in account current between a hank and a customer, or between a lending institution and its borrower. In the ease of a. single guarantee, the guarantor could only put an end to his liability by procuring from, the creditor a release, or by paying the amount of the debt. In the ease of a continuing guarantee the question had been raised whether and how the guarantee

might be put an end to. It might be taken that the guarantee as regards past transactions could only be put an end. to in the way stated with regard to single guarantees, l but the guarantor might by notice to the erditor revoke his guarantee in so far as it concerned future transactions. Similarly the death of the guarantor, or his bankruptcy, if brought to the notice of the creditor, would put an end to the guarantee so far as regarded future . transactions, but preserving the liability as regards past trails” actions.

Guarantees w r ere either secured or unsecured. If they were -secured it might he by reason of contract, and no person should enter into a guarantee unless he was, willing to lose his money, except upon condition that his guarantee was amply secured. Promises were made to be performed, and the following lines should ho remembered. by those who proposed to take on unsecured guarantees: T ’ Hafiz, t hy father, take -hold of thy knees in my pain Demanding thy name on stamped paper, one day or one hour, refrain; Are the links of thy fetters so light that thou eravest another man’s chain 2 Ihe guarantor might take security diIw 7 himself, or might stipulate that the creditor took security from the debtor. In this connection the lecturer would advise that the guarantor should see first that there was an ample margin of security, and seeondly, That the security was-one-that could be handled. In some circumstances a security showing a margin of only 10 per cent, migft be Se ‘V va ?, °f tlle kind tKat might be easily handled, isuch. as a war bond n-W £ ood .,. first mortgage whereas other securities might be insufficient, evln aNo° n r,o Paper + they ight sh ™ even a 50 per cent, margin, such as a second mortgage with a very large for ahead of it, or a guarantee roi a large amount— say, a £2O nm guarantee of the debts of a compS £40 S (¥in a l Set& wei ? shown at, say £40,000, because the assets of such a company would in most cases present difficulties m realisation. 1 There was a special rule with regard arisiuo^oii? 8 V 1 J av<mr pf guarantors, aiismg out of the equitable; doctrine subrogation, and that meant that the surety who had discharged the pi meipal debtor’s liability to the cieditor was entitled to have assigned Credito* SeCm ‘% beld W antf to" 1 " >T*Pect of such liability trn- 1 i 7 nd in the place of the creditoi and to use all. the creditor’s mWivfl 7 u?’ d€r to obtdin from the 7 deb 1 tor or an y co-surety inby hiim ** SS 0r liabiHty sustail * d

The surety’s right against the prinn7 a L? e n tor WSS thai> of indemnity, against his co-surety was that of contribution, and this right arose where theie were co-sureties whether they vteie liable as such or on a joint and seveial, and whether it arose under one or more than one > contract and rer n r arose > and regardless \hether the fact of the co-suretyship known to each co-surety or not Contribution meant that any one surety who had discharged more than his proportion of the principal debtor’s liability could claim a proportionate part of each of his co-sureties and from the representatives of a deceased co-surety, ic was important to note that m estimating the amount due as contribution account was to be taken I suc "h sureties as were solvent at the date of the claim for contribution.

Arising out of the doctrine of subrogation and of contribution was the rule that a surety who was entitled to contribution from a co-surety was entitled pio rata to the benefit of any security held by such co-surety, no matter what date on which such security was given and whether the surety knew or did not know of its ! existence when he gave his guarantee. A guarantor might be discharged in one of a number, of ways. Where the creditor, either alone or ■ in collusion with the debtor, acted so as to defraud or attempt to defraud the creditor, then in the absence of any provision in the agreement protecting the creditor the creditor might lose his rights against the guarantor, even though acting honestly and with the idea of benefiting the guarantor if he did not take the precaution of informing the guarantor and obtaining his consent. For this reason the forms of guarantee drawn by the banks and lending institutions, and indeed any well-drawn forms-of guarantee, contain special and often lengthy provisions to meet the following cases: If the creditor extended the time fixed for repayment of a debt without the consent " of the guarantor, the guarantor would he released. Similarly, in the absence of any special agreement, the guarantor would be released by a variation of the terms of the contract, by a. release of securities held by the creditor, by the creditor’s discharging or releasing the principal debtor or negligently failing to enforce securities or surrendering securities or allowing securities to be impaired or to deteriorate. The principle of law running through all these considerations seems to be that the guarantor, having contracted with regard to the existing state, of things, is entitled to have that state of

things preserved, and if the creditor varies the same then the guarantor would he entitled to say, These are not the conditions on which I contracted, and therefore I am not to be held bound.

The lecturer spoke of the antiquity of guarantees, and cited the proverb of Solomon, found in Proverbs xi., 15 : “He that is surety • for a stranger small smart for it: he that hateth suretyship is sure.” It would have been well for many people in Taranaki if this maxim had been before their eyes during the last four years.

THE PENALTY OF OVERWORK, Many People are Beginning to Feel , the Strain. The heavy tax of overwork, the extra strain so necessary to many trades and occupations, is hard' on the kidneys. The kidneys fail in their work and the poisonous matter collects in the system. If your work seems hard for you, if you have a lame, weak or aching back, if you seem tired and listless, if you notice sediment in the urine, unnatural colour, or irregular passages, and seem to be running down without apparent cause, begin at once with Doan’s Backache Kidney Pills, the remedy that has proved so beneficial to your neighbours. It has brought .strength to the backs of thousands of working men and women. Read this proof:

Mrs A. Spooner, Cambridge street, Patea, says: “My husband was a martyr to backache and other symptoms of kidney disorder for months. The ailment completely crippled him, and he was confined to his bed for some time. Dizzy attacks also troubled him a good deal, and his secretions were affected.' being thick and cloudy. He went on suffering in this way, nothing he took doing him any good; At last Doan’s Backache Kidney Pills were brought under his notice as a sure cure for kidney disorder, so he sent for a bottle. They worked wonders in'his case, five bottles curing him completely. That was three years ago, and he has been free of backache and kidney trouble ever since. We always keep Doan’s Backache Kidney Pills in the house, knowing how good they are.” Six years later, Mrs Spooner says: “My husband has not been troubled with backache since Doan’s Backache Kidney Pills cured him.”

Doan’s Backache Kidney Pills are sold by all chemists and storekeepers at 3/- per bottle, or will be posted oh receipt of price by Foster-McClellan But be sure you get DOAN’S.—6