Banking Law and Practice

CHAPTER 5

Guarantee

Learning objectives

After studying this chapter, you should be able to:

1 Describe the characteristics and legal implications of different types of guarantees

2 Describe the doctrine of undue influence, its application in the area of bank lending, and practical considerations for bankers in taking guarantees

3 Identify the rights, duties, and liabilities of the parties to a guarantee

4 Describe the circumstances in which a guarantee may be discharged or terminated

Introduction

Osborn’s Concise Law Dictionary defines security as “a possession such that the grantee or holder of the security holds as against the grantor a right to resort to some property or some fund for the satisfaction of some demand, after which satisfaction the balance of the property or fund belongs to the grantor.” When granting loan facilities, most banks in Hong Kong look first to the adequacy and validity of the security offered by the borrower, except in the case of personal loans, tax loans, and credit cards.

In pledging a security, a borrower enters into a legal agreement with the bank. As such, it is important for banking professionals to recognise the legal implications of taking a security so as to protect the bank from liability and avoid legal disputes.

In this chapter, we focus on guarantees, which are the most common forms of security taken by creditors, banks, and other businesses. We will discuss the tripartite relationship among the debtor (the borrower), the guarantor, and ...