Q&As

Can a creditor claim in a liquidation where their debt is secured against a third party guarantor's property?

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Published by a ½Û×ÓÊÓƵ Restructuring & Insolvency expert
Published on: 10 March 2021
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A guarantee is an agreement between one person/entity (the guarantor) and another person/entity (the creditor), whereby the guarantor will meet the current or future debts owed by the principal debtor to the creditor to the extent the principal debtor fails to do so. Because guarantees tend to be called on when the debtor is either insolvent, or is in a distressed position, they tend to be seen in Insolvency processes frequently and as such there is a vast amount of case law concerning their application and use.

As a matter of general

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Jurisdiction(s):
United Kingdom
Key definition:
Insolvency definition
What does Insolvency mean?

This can be defined by two alternative tests (Insolvency Act 1986, s 123):

• cash flow test: a company is solvent if it can pay its debts as they fall due, no matter what the state of its balance sheet (Re Patrick & Lyon Ltd [1933] Ch 786);

• balance sheet test: a company which can pay its debts as they fall due may be insolvent if, according to its balance sheet, liabilities (including contingent liabilities) exceed assets.

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