Guarantees and Indemnities
A guarantee can let you pursue a director or third party when a company cannot pay — but only if it is valid, properly documented, and enforceable.
What you'll learn
- Understand the difference between a guarantee and an indemnity
- See why personal guarantees matter for company debts
- Recognise the formalities that affect enforceability
- Appreciate common defences a guarantor may raise
7 min read
Guarantee vs indemnity
A guarantee is a promise to answer for another person's debt or default — the guarantor steps in if the primary debtor does not pay. An indemnity is a promise to make good a loss, and it can be a primary obligation that stands somewhat independently of the main debt. The two are often combined in one document. The distinction matters because it can affect what must be proved and what defences are available if you try to enforce it.
Why they matter
When you trade with a company, your customer is the company — and if it fails, your claim may be against an entity with no assets. A personal guarantee from a director or owner can give you an additional avenue: recovery against an individual who does have assets. For this reason, guarantees are a common and valuable feature of well-drafted credit terms, particularly for higher-risk or higher-value accounts.
Enforceability and defences
Guarantees are subject to formalities and to scrutiny. Depending on the circumstances, a guarantor may raise issues such as a lack of proper documentation, that they did not understand or were not properly informed about what they were signing, or various equitable defences. Whether these succeed turns on the facts and the drafting. Clear, signed documentation, given before credit is extended, puts a creditor in a far stronger position than an informal or after-the-fact arrangement.
A note on advice
This is general information only and not legal advice. The requirements for a valid and enforceable guarantee or indemnity, and the defences available to a guarantor, are technical and turn on detail; the law can change over time. Have your guarantee documents reviewed so they protect you when you need them. The free Merion tools can assist with credit documents, and for unpaid accounts you can refer a debt to Merion.
Key takeaways
- A guarantee answers for another's debt; an indemnity makes good a loss.
- Personal guarantees can reach a director when a company cannot pay.
- Formalities and clear documentation affect enforceability.
- Sign guarantees before extending credit, not afterward.
Frequently asked questions
Is a verbal guarantee enforceable?
Guarantees are subject to formalities, and a clear written, signed document is far safer to rely on. This is general information, not legal advice.
Can a guarantor get out of a guarantee?
A guarantor may raise defences depending on the facts, such as documentation or disclosure issues; success varies. Seek advice.
Should the guarantee be signed before credit is given?
Generally yes — obtaining a signed guarantee before extending credit puts the creditor in a stronger position.
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