3. What are "personal guarantees" and "bank guarantees"? When will I be required to provide these documents to other parties in business transactions?

3. What are "personal guarantees" and "bank guarantees"? When will I be required to provide these documents to other parties in business transactions?

In a business transaction, if a party (e.g. the buyer) is either unwilling or unable to pay in advance, or if that party is a limited company and its creditworthiness is unknown, then the other party (e.g. the seller) may require some form of guarantee of payment. The person who gives the guarantee is called the "guarantor" (or sometimes called the "surety").

The following two examples illustrate the differences between a personal guarantee and a bank guarantee.

Personal Guarantee

Party A (a limited company) has entered into a contract with Party B. Due to Party A's limited liability, Party B requires Party A's shareholders or directors to sign a personal guarantee of payment. By signing this guarantee, the shareholders or directors (the guarantors) will be personally liable for the debt or compensation if the company fails to pay.

Bank Guarantee

Party A has entered into a contract with Party B. Party A does not pay in advance, and therefore Party B requires Party A to provide a bank guarantee to secure the payment. Party A obtains the guarantee from a bank and provides it to Party B. If Party A subsequently fails to pay, then the bank will be liable for the debt or compensation, and will have to pay Party B.

You should note that if you have signed a personal guarantee as a guarantor, it will be difficult for you to avoid liability from that guarantee unless you can prove that you were misled or forced to sign the document, which is not easy to establish.

In respect of bank guarantee, you may have to pay a fee in order to obtain a guarantee from a bank. Alternatively, the bank may ask you to sign a separate personal guarantee or to provide security to the bank, which means that if the bank pays any debt or compensation as a result of the bank guarantee, the bank will then seek the same amount from you pursuant to the personal guarantee or through enforcing the security.

Before you sign any document of guarantee, you must scrutinise all of the terms and conditions, and, if possible, try to consult a lawyer beforehand.