Challenging guarantees for credit agreements

Some types of contracts are secured by a guarantee. A guarantee is an agreement entered into between a creditor and a guarantor. The guarantor promises to pay the debt of another person if they fail to pay.

The principal debtor is the person or company who receives the benefit of the agreement. They might receive funds under a loan agreement, or tenancy rights for a rent guarantee.

A guarantee is a form of surety, like an indemnity, or a bond. It is not a credit agreement in its own right. The guarantor does not receive any payment for providing the surety.

Guarantees are commonly used for private tenancies and for some bad credit loans. Business borrowing could be secured by a personal guarantee from someone in the company, such as a director.

When does the guarantor have to pay?

The creditor has to call the guarantee in before the guarantor becomes liable under the agreement. How and when the creditor can call in the debt depends on the terms of the agreement, and whether the guarantee is regulated by the Consumer Credit Act 1974.

When the creditor has called in the guarantee under the terms of the agreement, the debt has crystallised. The creditor can then enforce the guarantee agreement as though the guarantor is the principal debtor.

Read more about the money claims process.

Consumer Credit Act agreements

For agreements regulated by the Consumer Credit Act 1974, the guarantor's liability can only be crystallised after the expiry of a properly served default notice.[1] It could also require a demand for payment from the creditor.

Default notices must be served on the debtor and the guarantor to be valid.[2]

Guarantor's insolvency

A guarantor who applies for bankruptcy, an IVA, or a debt relief order, could have their guarantee liability written off in their insolvency.

For bankruptcy and IVAs, the whole amount is included whether the guarantee has been called in or not. For debt relief orders, the guarantee is only included if the guarantee has been called in. This is because it is a contingent liability.

Read more about contingent debts in insolvency.

The guarantee must be in writing and signed by the guarantor to be valid.[3]

When the guarantee must be a deed

The guarantee must be drawn up and executed as a deed if the credit agreement was signed first. That applies whether the principal debt has received their funds under the agreement or not.

The valid execution of a deed requires:[4]

• the document to make it clear it is a deed

• signing by the guarantor

• a witness to the guarantor's signature

Failing to include a date does not invalidate a guarantee.[5]

Consumer Credit Act guarantees

A guarantee that is provided for a credit agreement regulated by the Consumer Credit Act 1974 is also regulated by that Act. The Consumer Credit Act sets out strict rules for the form and content of agreements.

The signature can be electronic if the guarantor agrees.[6] It is common practice for guarantees and credit agreements to be signed electronically. Clicking on a button labelled 'I Accept' or similar counts as signing an agreement under the Consumer Credit Act 1974.[7]

The guarantee document must contain all the terms of the security, other than implied terms, and the terms must be legible when presented to the guarantor.

Regulations set out the prescribed terms for guarantee agreements to be valid.[8]

A Consumer Credit Act guarantee must contain:

• a prescribed heading[9]

• the names and postal addresses of the principal debtor, creditor, and guarantor

• a description of the loan agreement[10]

• a prescribed statement of the guarantor's rights[11]

• a signature box containing a prescribed statement[12]

The wording in all prescribed statements must be followed exactly with no errors. Any mistake means a guarantee is improperly executed.[13]

When the court can grant permission to enforce

A creditor must apply for permission from the court to enforce an improperly executed guarantee or a guarantee which is not in writing.[14]

If permission to enforce is refused by the court the guarantee is treated as never having effect.[15] Payments received in respect of the guarantee must be repaid to the guarantor.[16]

The improper execution of a guarantee agreement does not stop the creditor enforcing the agreement against the principal debtor. If the principal debtor has a defence, a guarantor has the same defence against the guarantee, because the guarantor's liability cannot exceed that of the principal debtor.[17]

The creditor must provide copies of a guarantee agreement following a statutory request under the Consumer Credit Act 1974.[18]

The creditor has 12 working days to comply with the request. After that, it is not enforceable until they do comply.

Where a guarantee is provided after (or at the same time as) the credit agreement is signed, the creditor must give the guarantor a copy of the principal agreement and any documents referred to in it.

Where a guarantee is provided before the credit agreement is signed, the creditor must give the guarantor a copy of the principal agreement and copies of any documents referred to in it within 7 days.

Subject access requests

The guarantor can request a copy of the guarantee and related documents under their data protection rights.[19] The data must be provided free of charge.

See the Information Commissioner’s website for more information.

The Financial Ombudsman Service can deal with complaints about Consumer Credit Act guarantees. They can tell the creditor to write the guarantee off if it is fair and reasonable, or if the creditor broke Financial Conduct Authority rules. The Financial Ombudsman could decide it is reasonable to write off the guarantee if the creditor did not:[20]

• carry out proper affordability checks

• check the guarantor was not pressured into giving the guarantee

• explain what would happen if the principal debtor missed payments

Affordability checks mean checking the guarantor can make the contractual payments if the principal debtor fails to do so.

The guarantor usually has six years from the problem occurring to complain to the Financial Ombudsman.

How to complain to the Financial Ombudsman

The guarantor must complain to the creditor before they can complain to the Ombudsman. The creditor has eight weeks to deal with the complaint and send a final response. If they don't send a final response, the guarantor can complain once the deadline has passed.

The guarantor has six months to make a complaint to the Ombudsman following a final response from the creditor.

What to write in the complaint

The guarantor should explain how the creditor has behaved in a way that is not fair and reasonable. They can point out that the creditor has not followed the relevant law or guidance. The guarantor should point out any circumstances that might put them in a worse position, such as a disability that means they cannot understand complex information easily.

Status of the Ombudsman decision

The Financial Ombudsman's decision is binding on the creditor.

A complainant guarantor can reject the Ombudsman's decision. The decision is assumed to have been rejected if the guarantor does not confirm they have accepted it.[21]

Previous Ombudsman decisions

The Financial Ombudsman publishes its decisions after investigating a complaint. The decisions are a guide to how future complaints might be handled. They are not binding on the Ombudsman in future cases.

The Ombudsman instructed a creditor to write off a guarantee liability where a creditor had encouraged the guarantor to reduce their other expenses to make it affordable.[22]

In another case, the Ombudsman found a creditor failed to assess whether the repayments were not affordable to the guarantor.[23]

The creditor might issue a claim for a money judgment in the County Court against the guarantor.

A guarantor who already has a County Court judgment against them because of a guarantee could consider whether they can set aside or vary the judgment.

Creditor issues a court claim

Once the creditor issues a claim in the County Court, the guarantor has 14 days to file either an:

• admission

• defence

• acknowledgement of service, for more time to file a defence

Read more about admitting and defending court claims.

Ask for time to complain to the Ombudsman

A guarantor could decide they want the Ombudsman to deal with their complaint, instead of the courts.

The Ombudsman does not charge for their service. They can take into account what is fair and reasonable, instead of following the letter of the law. The Ombudsman can take into account breaches of FCA guidance, such as the failure to conduct affordability checks.

The courts can order the losing party to pay the winning party's costs. They must apply the law and cannot make a decision based on what might be a fair outcome.

The Financial Ombudsman can still deal with a complaint once the creditor has issued a claim. To get time to make a complaint to the Ombudsman after they receive a claim form, the guarantor can file a defence to the claim, setting out their reasons for defending liability.

The Civil Procedure Rules provide the court with case management powers to allow alternative dispute resolution, such as an Ombudsman complaint.[24] A guarantor can ask for a stay to allow the case to be settled when they submit their defence, or when they file their allocation questionnaire.

The court has an active case management duty to encourage parties to use an alternative dispute resolution procedure where appropriate.[25]

Guarantor's defence of undue influence

The guarantor could defend a court claim on the basis of undue influence or duress from the creditor or the principal debtor. A creditor who takes a guarantee must be satisfied that the guarantor has not been pressured into it. This is called a rebuttable presumption of undue influence. If the creditor has not taken steps to find out if the guarantor is acting from free will, the court could set the guarantee aside.