The Legalities of the Guarantee
What is a Guarantee
According to Contract Law, CAP. 149, a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in the event of their default.
A guarantee may be continuous or unlimited extending over a number of transactions, or it may be of limited duration covering a signle transaction.
On the basis of the guarantee, the guarantor assumes a responsibility jointly and wholly and to the same extent as the principal debtor towards the creditor and unconditionally guarantees to repay the outstanding balance of the loan on behalf of the principal debtor, where the principal debtor becomes in default.
Therefore, financial institutions/banks may proceed with the filing legal action against the principal debtor and his/her guarantor(s) and obtain a court judgment, jointly and severally against all of them as co-defendants.
Defences available to a guarantor
The contract law, Cap 149 enunciates the circumstances under which a guarante may be void and thus become unforecable againts the guarantor. Such circimstances are misrepresentation and deceit and the concealment of essential facts or information to the guarantor in relation to the guaranteed transaction. Extortionate interest of the transaction could also be a factor that could lead to such declaration. A void contract is not enforceable.
Circumstances under which a guarantor may be discharged
The Contract law, Cap 149 affords guarantors additional defences for the automatic discharge of their obligations in the following circumstances:
- Where there is any material variation to the terms of the original contract between the creditor and the principal debtor, without the guarantor’s consent, the guarantor will be discharged from any liability regarding subsequent transactions made after the said variation.
- The guarantor is released from any contract between the creditor and the principal debtor as a result of the principal debtor’s release or by any act or omission of the creditor, the legal effect of which is to discharge the principal debtor.
- Where, without the guarantor’s consent, a subsequent binding agreement is made between the creditor and the principal debtor for a restructuring of the loan.
- Where the creditor commits an act incompatible with the rights of the guarantor, or fails to perform an act which is required by reason of his obligations owed towards the guarantor, and as a result the ultimate satisfaction of the guarantor is overlooked by the principal debtor.
However, there are circumstances under which a guarantor will not be discharged. For example, in the absence of an express contractual provision to the contrary, mere failure by the creditor to instigate legal proceedings or the taking of other remedy measures against the principal debtor, does not release the guarantor.
In case of co-guarantors, the discharge of one guarantor by the creditor does not imply the discharge of the others, nor does it discharge the one who was as such released from his liability against the other guarantors.
Death of Guarantor
According to the provisions of the Contract Law, in the absence of an express contractual provision to the contrary, the death of guarantor operates, with respect to future transactions, as revocation of the continuing guarantee.
In aPursuant to the provisions of the Protection of a Specific Category of Guarantors Law No. 197 (I)/2003 (“PSC Law”) applies only where the guarantor is a natural person. It should be highlighted however, that the PSC Law is not applicable in situations where the principal debtor is a legal person and the guarantor, at the time of signing the contract of guarantee was acting under the capacity of the director of the principal debtor.
The SCG Law affords the same remedies, defences, rights and obligations apply as in the Contract Law to guarantors. Morover the SCG Law provides protection to guarantors where there is alienation of assets by the Principal Debtor. For the purposes of the SCG Law, the circumstances of alienation of assets arise where the principal debtor alieanates his/her assets to such level without leaving sufficient assets his name for the satisfaction/discharge of the balance of the loan debt. In a different scenario, the alienation takes places in favour of a related person in the form of a gift, except in the event whereby the transfer is done for legitimate purposes such as for education or medical purposes or for the basic needs of the principal debtor’s family.
Further, the SCG Law imposes the obligation on credit institutions to inform the guarantors in writing and without any delay when the principal debtor delays payment of at least three installments or of any other failure by the principal debtor to meet any other obligation arising under the loan. The failure of the creditor to do so is deemed as a breach of its legal obligations towards the guarantor, and such a failure on the part of the lender releases the guarantor from his/her obligations.
It should be noted that the SCG Law applies to contracts of guarantee signed after the application of the legislation in 2003. The legislation applies also to contracts of guarantee signed after 2003 even for a loan was granted before
The Insolvency of Natural Persons (Personal Repayment Plans and Debt Exemption Decree) Law (No. 65(I)/2015), (“the INP Law”)
The INP Law includes provisions regarding the handling of guarantors, who are defined as natural persons.
The INP Law prohibits credit institutions to instigate legal or any other proceedings against the guarantor who is a natural person in the following cicrumstances:
I. The wealth of the guarantor, excluding his main residence, does not exceed €750.000. The main residence of the guarantor cannot be the item of a public auction for the purpose of the creditor’s satisfaction against the guarantor in relation to the liability of the latter as a result of his duties owed to the principal debtor, unless such main residence has been mortgaged in favour of the creditor in relation to the specific debt.
II. At the time of signing the contract of guarantee, the guarantor assumed liability of up to €250.000 or as with the application of the law to have liability in accordance with the conditions of the contract of guarantee for the remaining debt of up to €250.000.
III. The loan is secured with a mortgage on the main residence of the principal debtor.
It’s pointed out that if any payment takes place on behalf of the principal debtor by the guarantor, the latter is considered to be an unsecured creditor of the former and the amount that the guarantor paid to the creditor shall be claimed by the guarantor against the principal debtor. The guarantor’s right to file a court actions against the principal debtor or his co-guarantor, is limited to 3 years from the day that the guarantor has repaid any outstanding balance of the loan on behalf of the principal debtor.
It should be noted that each guarantor of a determined debt is summoned to attend any of the creditor’s meetings in order to submit his comments in relation to the proposal for a personal repayment plan which is prepared by the insolvency consultant of the principal debtor.