3. What are "personal guarantees" and "bank guarantees"? When will I be required to provide these documents to other parties in business transactions?
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Setting up and running a small or medium-sized business in Hong Kong »
B. Location of business premises, licences, documents of guarantee and human resources matters »
In a business transaction, if a party (e.g. the buyer) is either unwilling or unable to pay in advance, or if that party is a limited company and its creditworthiness is unknown, then the other party (e.g. the seller) may require some form of guarantee of payment. The person who gives the guarantee is called the "guarantor" (or sometimes called the "surety").
The following two examples illustrate the differences between a personal guarantee and a bank guarantee.
Party A (a limited company) has entered into a contract with Party B. Due to Party A's limited liability, Party B requires Party A's shareholders or directors to sign a personal guarantee of payment. By signing this guarantee, the shareholders or directors (the guarantors) will be personally liable for the debt or compensation if the company fails to pay.
Bank Guarantee
Party A has entered into a contract with Party B. Party A does not pay in advance, and therefore Party B requires Party A to provide a bank guarantee to secure the payment. Party A obtains the guarantee from a bank and provides it to Party B. If Party A subsequently fails to pay, then the bank will be liable for the debt or compensation, and will have to pay Party B.
You should note that if you have signed a personal guarantee as a guarantor, it will be difficult for you to avoid liability from that guarantee unless you can prove that you were misled or forced to sign the document, which is not easy to establish.
In respect of bank guarantee, you may have to pay a fee in order to obtain a guarantee from a bank. Alternatively, the bank may ask you to sign a separate personal guarantee or to provide security to the bank, which means that if the bank pays any debt or compensation as a result of the bank guarantee, the bank will then seek the same amount from you pursuant to the personal guarantee or through enforcing the security.
Before you sign any document of guarantee, you must scrutinise all of the terms and conditions, and, if possible, try to consult a lawyer beforehand.
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Setting up and running a small or medium-sized business in Hong Kong
A. Types of business organisation – sole proprietorships, partnerships and limited companies
1. What are the characteristics of sole proprietorships, partnerships and limited companies? What are the advantages and disadvantages of each type of business?
2. How can I set up a sole proprietorship, partnership or limited company? Do I have to obtain a business registration certificate from the Inland Revenue Department and register with the Companies Registry before commencement of business?
3. Instead of setting up a new business, can I acquire an on-going business? What do I have to bear in mind if I intend to do that?
B. Location of business premises, licences, documents of guarantee and human resources matters
1. Do I have to obtain a licence(s) from the Government for my business?
2. Are there any legal stipulations about human resources management that apply to running a business in Hong Kong?
C. Making a business contract
1. What are the basic requirements for making a valid contract?
2. Other than the essential elements as mentioned on question 1, what are the other important matters that the parties should note when making a contract?
3. If one party breaches a contract term, what can the other party do? What are the possible liabilities of the defaulting party?
4. To avoid certain liabilities, some business people insert exemption or exclusion clauses into their contracts. Are these contract terms valid under the law?
5. What if I am misrepresented (misled) by others in entering into a contract. Will the law help me to discharge the contract or claim compensation?
6. What if I need to use a middleman (such as an agent) to act on my behalf to negotiate for business or enter into contracts with others. What should I be aware of in such kinds of business dealings?
D. International trade and Internet transactions
1. What should I be aware of before making a contract with others through the Internet?
E. Taxation, accounting and Government funding
F. Business disputes and legal action
G. The Companies Ordinance (Cap.622)
1. Part 1 Preliminary
2. Part 2 Registrar of Companies and Companies Register
3. Part 3 Company Formation and related matters
4. Part 4 Share Capital
5. Part 5 (Transactions in relation to Share Capital)
6. Part 9 Accounts and Audit
7. Part 10 Directors and Company Secretaries
8. Part 12 Company Administration and Procedures
9. Part 19 Investigations and Enquiries
A. Scenarios in Hong Kong
Answer to Scenario 1