Guarantee and Indemnity

It is quite common for a person to guarantee a loan taken by another person. For example:

  1. parents becoming guarantors for their children’s study loans (PTPTN, private companies bonded scholarship program, JPA scholarship, and study loan offered by financial institutions, just to name a few);
  2. a friend or relative becoming guarantor for his friend/relative’s car loan or housing loan;
  3. directors and/or shareholders guaranteeing loans taken by their company; and
  4. a company guaranteeing loans taken by another company (normally undertaken by related companies).

There may also be some guarantees to be outside the context of a loan. For example, a director who guarantees his company’s payment of certain invoices to another company.

What are my liabilities as a guarantor?

It depends.

Two types of guarantees are commonly used – Guarantee and Indemnity.

And technically, a person who signs a Guarantee is called a guarantor while a person who signs an Indemnity is called a person giving indemnity.

To a layperson, there is no difference between the two. In both cases, the guarantor/person giving indemnity would have to pay if the principal borrower failed to do so.

However, there are some very important distinctions between the two when it comes to legal effects of the two.

Under a Guarantee, the guarantor’s liabilities are limited to only what the principal borrower is liable to pay.

Under an Indemnity, the person giving indemnity would be liable to indemnify the lender for all its losses. In other words, even if the principal borrower is not liable to pay certain amount, the person giving indemnity would be nevertheless liable.

For example, if the principal borrower is bankrupt, interest on his loan would be stopped or capped as at the date of his bankruptcy. The guarantor’s liability would therefore also capped as at the date of the principal borrower’s bankruptcy. However, the lender is entitled to continue to charge interest against the person giving indemnity until the debt is fully settled. In effect, the person giving indemnity would be liable for a sum more than that of the principal borrower.

How do I know What I have Signed?

This would depend on the wordings of the agreement that you sign. The title of the agreement is almost inconsequential.

Telltale signs include:

  1. The agreement says you are deemed as the principal debtor.
  2. The agreement says you are liable for sums that are not recoverable under a guarantee.
  3. The agreement says you will indemnify the lender.
This article is written by our Partner, Loke Yuen Hong