Guaranteeing a debt: the guarantee
Verified 13 February 2023 - Directorate for Legal and Administrative Information (Prime Minister)
When you apply for a loan from a bank, you must to provide guarantees. Among the possible guarantees, there is the security. It is a contract by which a person, called a guarantor, undertakes to repay your debt in your place when you are unable to pay.
A bond is a contract by which a person, called surety, undertakes to pay the money due to a creditor by the debtor when he is unable to pay his debt.
The contract of guarantee is a ancillary contract. It depends on the main contract which binds the debtor and the creditor. The guarantee will be used to ensure that the debtor fulfills the obligation laid down in the main contract. This usually involves guaranteeing a bank loan or paying rent.
Example :
An individual entrepreneur goes to a bank to get a bank loan. As part of this loan agreement (main contract), the entrepreneur commits to repay the loan by paying monthly installments to the bank. Here, the entrepreneur is the debtor and the bank is its creditor.
As security, the bank requires a third party (e.g. a relative) to act as a guarantor for the entrepreneur. If the borrower is unable to repay the loan, the bank can then turn to the surety to claim the payment.
It exists 2 types of bonds : civil and commercial bonds.
The bond is civil where the person provides security for a debtor free of charge (amount of money, benefit, etc.) This is the most common case.
The bond is salesman when it at least fills one of the conditions following:
- Surety has a heritage interest and staff to pay the main debt (for example: an employee backs his boss on the verge of bankruptcy to avoid him and keep his job).
- The deposit is a bank
- The security shall be posted by a trader having an interest in being surety
- The bond is attached to a commercial act. For example, a merchant receives a bond for the purposes of his business
As part of a commercial bond, the bond is automatically joint and several. In addition, the judges of the Commercial Court have jurisdiction in the event of a dispute.
Bonds are used to secure one or more obligations (debts) already existing or futures. These debts must be determined or determinable. This means that the guarantee then covers the defined debt (the principal debt) and the indefinite debt (ancillary charges, interest, etc. that arise from the principal debt).
Existing or future debt
An obligation is said existing where at the time of the guarantee the debt already exists. This is the case, for example, in a bank loan.
On the other hand, an obligation is future when at the time of the guarantee, it does not exist yet. This is the case, for example, with a bond to guarantee a positive balance on a current account. It is only when the balance turns negative that the debt is created.
Specified or determinable debt
A bond may be taken on a future debt provided that it is clearly identified in the contract of guarantee. The amount does not necessarily need to be determined at the time of signature of the instrument.
When the contract of guarantee for future debts is terminated, the guarantee is still held by the debts which arose before the end of the contract.
Example :
A bond has been put in place to guarantee a loan contract. The defined debt is the amount of the loan, the indefinite debt is for example interest or late fees.
The surety agreement shall contain all the information necessary for the surety to know exactly what it is committing to. It must also know all the elements that enable it to fulfill its role.
In order for the guarantee of a determinable obligation to be valid, the the principal debtor is mentioned in the document of security so that he may be identified.
Example :
A contract of guarantee, which guarantees a positive balance on a current account, must contain information identifying the owner of the current account (the principal debtor).
Debt proportionate to the assets of the guarantor
The surety cannot guarantee an amount that is too high in relation to his assets. Indeed, in case disproportionate commitment, the guaranteed amount will be reduced up to the amount for which the guarantor could actually commit at the time of signing the guarantee.
Example :
A person has a total wealth of €500,000 : movable property valued at €300,000, secondary movable property of €150,000 and personal savings amounting to €50,000.
He is being asked to act as a guarantor for a debt of €2 000 000. Since the amount is much higher than the surety's assets, in the event of an undertaking, the guaranteed amount will be reduced to the amount that the surety can actually bear.
For the guarantee contract to be valid, several conditions must be completed.
1. Adequate information of the guarantor
Surety must to receive information of the creditor before committing.
Surety must have sufficient financial means to secure the debt. Indeed, if the surety becomes insolvent then the principal debtor has to find him a substitute. It may also offer another guarantee (example: mortgage).
The contract of guarantee may be drawn up by electronically.
The professional creditor must to warn the guarantor (natural person) where the debtor does not have the financial capacity to fulfill his obligation. If he does not do so, the creditor will not be able to appeal to the surety for the sums corresponding to the prejudice to the applicant.
Before 31 March each year, the creditor must inform the guarantor (natural person) of the amount of principal, interest and ancillary costs which remain due on 31 December of the previous year.
Warning
If the creditor does not fulfill this obligation, interest and penalties due (to be paid) from the date of the previous disclosure until the next disclosure are not guaranteed by the surety.
The creditor must also remind the guarantor (natural person) of one of the following information, depending on the type of guarantee:
- The bond has a fixed term : the creditor must recall the commitment end date of the security
- The bond has a indefinite duration : the creditor must recall the possibility for the guarantor to terminate his employment and conditions in which it is to be done
The creditor must inform the guarantor as soon as first non-settled payment incident of the principal debtor. He must notify her during the month in which the payment should have been made. Otherwise, the security is not more security for interest and penalties that have expired (to be paid) between the date of the payment incident and the date on which the guarantor is informed.
Please note
These rules also apply where the creditor is a credit institution or financing business and the guarantor is a professional.
2. Free and informed consent of the surety
Where the guarantor agrees, his consent must meet the following conditions:
- It must be free : the surety must not have given his consent under duress (e.g. blackmail, threats, etc.).
- It must be enlightened : the guarantor must be aware of the conditions and risks of the guarantee for which he undertakes.
- It must be unflawed : the guarantor must not be mistaken about the conditions of his surety bond or have been misled by false information.
If these conditions are not met at the time of signature of the guarantee document, it may be canceled.
Cancelation can be requested by any interested party the competent court (court for civil surety and commercial court for commercial surety). However, nullity will not be pronounced if the error is made by the debtor.
3. Ability to take out security
The guarantor must have contracting capacity a bond. Thus, it must not be a non-emancipated minor (still under the authority of his parents or a legal guardian) or protected major.
Warning
If a contract of guarantee is concluded when the guarantor does not have the capacity, the act will be considered as loose. In other words, the bond will not be valid and the bond will not be able to guarantee the debtor.
There can be several types of bonds:
- The leader or one of the associates may be surety for the business with a professional creditor. This is the case, for example, of a manager who is guarantor of a commercial lease
- One business may also be surety. The surety must be given in its own interest and must not run counter to its social purpose, that is to say, to the activity it pursues. For example, if the activation of the bond prevents him from continuing his activity then the bond is not valid
- One natural person may also act as a guarantor for another natural person. For example, an employee may take out a bond to secure the employer's debts
Please note
There are mutual guarantee businesses which can be a guarantor for the debtor in exchange for money (commercial guarantee).
4. Legal and certain security
The bond must be both lawful and certain.
The bond is lawful where its subject matter (the reason for its conclusion) does not run counter topublic policy, that is to say, contrary to all the mandatory rules whose objective is to preserve social peace. For example, it is not possible to endorse an illegal sale of weapons.
As for the character certainHowever, this means that the debt on bail must exist or may exist, be determined or determinable.
Where the security is a natural person individual business (in particular, specific formalism. If this is not respected, the act will not be not valid.
Indeed, the guarantor must add to the hand that it shall act as guarantor. The bond may be written by hand or in electronic format.
It shall contain the following information:
- Sound liability to pay to the creditor what the debtor owes him when he cannot pay
- The limit of its commitment : amount in principal and accessories in all letters and figures
- If the deposit is deprived of the benefit of discussion or division : it must recognize that it cannot require the creditor to sue the debtor first or to divide its proceedings between the sureties
On the other hand, where a security is given by a document drawn up by a notary or a lawyer, then the mention is not compulsory.
FYI
The legal surety (business) is not concerned by adding the words handwritten.
The professional creditor must to warn the guarantor (natural person) where the debtor does not have the financial capacity to fulfill his obligation. If he does not do so, the creditor will not be able to appeal to the surety for the sums corresponding to the prejudice to the applicant.
Before 31 March each year, the creditor must inform the guarantor (natural person) of the amount of principal, interest and ancillary costs which remain due on 31 December of the previous year.
Warning
If the creditor does not fulfill this obligation, interest and penalties due (to be paid) from the date of the previous disclosure until the next disclosure are not guaranteed by the surety.
The creditor must also remind the guarantor (natural person) of one of the following information, depending on the type of guarantee:
- The bond has a fixed term : the creditor must recall the commitment end date of the security
- The bond has a indefinite duration : the creditor must recall the possibility for the guarantor to terminate his employment and conditions in which it is to be done
The creditor must inform the guarantor as soon as first non-settled payment incident of the principal debtor. He must notify her during the month in which the payment should have been made. Otherwise, the security is not more security for interest and penalties that have expired (to be paid) between the date of the payment incident and the date on which the guarantor is informed.
Please note
These rules also apply where the creditor is a credit institution or financing business and the guarantor is a professional.
Depending on the type of surety, the rules applied are different. If the security is commercial, the security will necessarily be joint and several. If the security is civil, the security may be simple or joint.
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Simple deposit
The deposit may not be activated before the maturity of debt where the principal debtor does not pay.
As a simple surety, it can decide to actuate the benefit of discussionThat is, it will force the creditor to sue the principal debtor first before turning to it. The creditor may ask him to sell his property and pay himself with what the sale has brought in. If the main debtor still cannot pay, then it will be up to the surety to pay the debt, interest and penalties.
Example :
A creditor A leases a commercial premises to a debtor B. Surety C is surety for the payment of the rents of debtor B.
Debtor B does not pay his rent, creditor A must ask debtor B to pay by any means. He can ask him to sell some of his property in order to pay the rent. If, despite all this, debtor B cannot pay his rent, then creditor A can ask bail C to pay.
Where there is more than one surety, there shall be division profit which obliges the creditor to divide his action between each surety to the extent to which they have committed themselves.
Example :
Creditor A rents an apartment to debtor B. Bonds C, D and E shall act as a guarantor for the payment of the rents of debtor B. The C and D securities shall bear a security of up to 20% of the rent each and the deposit E is a deposit for the rest (60%).
If debtor B does not pay his rent, creditor A can ask the surety to pay it up to the amount to which they have committed themselves. So he can ask 20% from rent to deposit C, 20% the rent to the deposit D and 60% from rent to bail E.
Joint and several guarantee
The deposit may not be activated before the maturity of debt where the principal debtor does not pay.
As joint and several surety, the cannot use discussion benefit and the division profit :
- Discussion Benefit : the guarantor may require the creditor first to turn to the debtor to obtain payment of his debts.
- Division Profit : the guarantor to whom the creditor applies to obtain repayment of his debt may request that the creditor divide his proceedings where several persons are guarantor.
If there are several joint and several sureties, the creditor can turn to any of the sureties to recover all debt, interest and penalties. Moreover, the creditor is not obliged to bring all possible proceedings against the debtor before appealing to the guarantor.
Example :
A business makes a loan from a bank. Its manager and 2 employees are guarantor. Each employee is liable for 25 of the debt and the manager is liable for 50 of the debt.
The manager and the employees have an economic interest in being the guarantor of the business, so it's a commercial bond, and the bonds have to be joint and several.
Since the sureties are jointly and severally liable, if the business does not pay one of its monthly installments, the bank can directly apply to the sureties for payment without having to take all possible actions against the business (loss of discussion benefit). In addition, the bank may claim the full amount of the monthly installment not paid to one of the bonds even though they have only committed themselves for part of the debt (loss of division profit).
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Single deposit
Surety who has paid the debt in whole or in part has a personal appeal against the principal debtor. The appeal relates to sums paid by the surety, interest and costs.
It's called subrogation. The surety subrogates the creditor in his rights. In other words, it takes the place of the creditor and thus recovers its rights and obligations towards the debtor. It is then entitled to claim debt repayment to the principal debtor.
Warning
In order to have a right of appeal, the guarantor must notify the debtor of his intention to pay his debt in advance. If the debtor has paid his debt and the surety has already done so without giving him notice, he will only be able to make a application for refund to the creditor.
Several sureties
Bonds that have paid the debt in whole or in part have a power of subrogation which gives them rights of appeal. Bonds subrogant the creditor in his rights. In other words, they take the place of the creditor and thus recover his rights and obligations towards the debtor. This allows them to turn against the principal debtor to obtain the debt repayment which they paid for him:
- Personal remedies against the principal debtor: it covers the sums paid by the sureties, interest and costs. The sureties may each sue the principal debtor to the extent of what they have paid
- Subrogatory action against other securities: If the sureties are solidarity, the guarantor who has paid the debtor's debt shall have a personal right of appeal against the principal debtor and a right of subrogatory appeal against each of the other sureties up to the amount which they had undertaken to pay
Warning
In order to have a right of appeal, the guarantor must notify the debtor of his intention to pay his debt in advance. If the debtor has paid his debt and the surety has already done so without giving him notice, he will only be able to make a application for refund to the creditor.
Disappearance of the principal obligation
The bond is a ancillary contract which depends on a main contract concluded between a debtor and a creditor. It serves to secure an obligation or debt of the debtor. When that debt or obligation disappears, the undertaking of the guarantor also disappears.
Example :
A trader rents a commercial premises, a third party guarantees payment of the rents. When the trader decides to leave and no longer rent a commercial premises, then the contract of guarantee to guarantee the payment of the rents no longer exists, it disappears.
Spontaneous withdrawal of the guarantor
Where the guarantee guarantees a future debt for an indefinite period (for example, guaranteed by the Head of company of the debtor balance of the company's current account), the guarantor may to terminate his commitment when she wants to. But it must wait the time limit in the contract of guarantee or in a reasonable time before breaking his commitment.
Loss of subrogation rights of the guarantor
If the surety loses his right of subrogation because the creditor has committed a fault, then the surety is discharged of his obligation in proportion to the damage suffered.
Example :
A bank applies for a bond for a loan it makes to a business. The manager is guarantor of the loan.
The bank never pays the amount of the loan to the business, which is no longer able to pay the interest. Since the bank committed a mistake by not disbursing the loan, the manager is relieved of his obligation.
In the event of the death of the guarantor, his heirs are obliged to pay debts that arose before death. However, they do not have to pay the debts that arise after death.
Example :
A person guarantees payment of the debtor's commercial rent to the creditor. The bail died in September 2022. If the debtor has not paid his rent before the death of the surety, the heirs of the surety will have to pay the debts of the debtor. In contrast, all unpaid rents after the death of the surety do not have to be paid by the heirs of the surety.