My colleague Stave Maskell published the following article on subrogation, which sets out the rights of personal guarantors in taking over the security and debt from the bank or organisation for which they have settled a guarantee for.
SUBROGATION - defined as “the substitution of one person for another so that the person substituted succeeds to the rights of the other”.
In relation to Personal Guarantees it works as follows:
There are usually three parties, creditor (lender), customer and guarantor. If the creditor serves a demand for payment on the customer and the customer fails to pay then the guarantor will be called upon to do so under the terms of his or her guarantee. If the guarantor pays off the customer’s debt he or she is entitled to be reimbursed or indemnified by the customer.
The guarantor is also subrogated to the creditor’s security rights against the customer to the extent of the payment made to the creditor. In the event that the guarantor’s liability under the guarantee and the amount paid does not cover the creditor’s entire claim then the guarantor will acquire a proportionate interest in any other securities held by the creditor along with any claims against co-guarantors. It does not matter whether the guarantor was aware of the existence of the securities at the time of the contract. Furthermore, the guarantor will also have a right of subrogation in relation to other security taken after his or her guarantee.
Note. Many bank guarantees will contain a clause excluding the guarantor’s right of subrogation until the customer’s liabilities have been paid in full.
For further information contact Steve Maskell
9 February By Mel Loades / Steve Maskell