Term
Surety
A third party’s undertaking, as guarantor, to pay a debt if the debtor does not. It arises from a written declaration, and for company loans banks often require it from the director personally.
Updated
What it means
A guarantee, or surety, secures an obligation: a third party, the guarantor, undertakes in writing to satisfy the creditor if the debtor fails to pay. The guarantor is liable for someone else’s debt with all their assets. A typical example is an owner guaranteeing their company’s loan.
The creditor can usually turn to the guarantor only after asking the debtor in writing to pay and the debtor failing to do so. A guarantor who pays the debt is entitled to recover what they paid from the debtor.
The Slovak word ručenie is also used in another sense, meaning the extent of liability for a company’s debts. A shareholder of a limited company is liable for its obligations only up to any unpaid contribution, a sole trader with all their assets. A special case is liability for VAT.
How it works in practice
For company loans, banks often ask for a guarantee from the director or shareholder. We explain to clients that this effectively removes the limited liability of the company, because the owner is personally liable for that debt. Before signing we recommend negotiating a cap on the guarantee and its duration.
In the financial statements of a company that guarantees another company’s debt, for example within a group, we disclose the guarantee in the notes as a contingent liability. If payment is likely to be required, we create a provision.
A guarantee is one of several security instruments. We compare it with a security transfer of title, a pledge, a bank guarantee or a bill of exchange. Each has different consequences for the debtor and the guarantor.
What to watch out for
The guarantor is also liable for ancillary amounts: interest, late-payment interest and recovery costs. The sum for which they end up liable can be much higher than the original loan.
A guarantee remains valid after the guarantor leaves the company, for example by selling their stake or ceasing to be director. When leaving, a release from the guarantee must be negotiated with the bank, or the former owner may end up paying debts they no longer control.
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