ZOOM ON... Personal guarantees

Definition

A surety bond or personal guarantee is a written contract by which a natural or legal person (the guarantor) undertakes to pay the debt of another person (the debtor or issuer) for the benefit of a creditor (the lender) in the event that the debtor is unable to do so.

Advantage

The main advantage of the contract of suretyship is that it makes it possible to constitute, for the benefit of the creditor, a second debtor known as an accessory debtor (the surety).

Disadvantage

The major disadvantage of the guarantee is its accessory nature in relation to the loan contract or the bond issue (the main contract) from which the claim to be guaranteed is derived.

Thus, if the main contract is null and void, the guarantee contract in turn becomes null and void, i.e. it no longer has any reason to exist.

The different types of bonds

1. The simple surety bond

In the case of a simple surety bond, the creditor must first contact the debtor and do everything possible to recover what is owed. He can only turn against the surety after having used all possible recourses.

Example: A financial institution ( the lender) grants a loan of 10,000 euros to a company (the debtor). The director of this company acts as guarantor (the surety) for 10,000 euros. In the case of a simple guarantee, the lender must first turn to the debtor or borrower to try to recover the sums due. It is only if the latter is insolvent and the proceedings against him are unsuccessful that the guarantor will be engaged.

2. Joint and several surety bonds

In the presence of an indivisible joint and several bond :

• The bank or lender can claim the full amount of the bond from the guarantor if the borrower fails to meet his obligations.
• The bank or the lender has the right, when different people have acted as guarantor for the same debt, to recover the entire amount of the guarantee from only one of them (this is the reason why it is joint and several). The guarantor thus sued cannot ask the bank to sue the debtor beforehand.
• In the event of the death of the guarantor, the bank or the lender may take action against each of the guarantor's heirs who have accepted the estate outright. The bank or lender can then obtain the full amount of the guarantee.

Example: A financial institution ( the lender) grants a loan of 10,000 euros to a company (the debtor). The two directors of this company act as guarantors (the surety) for an amount of 10,000 euros. Within the framework of a joint and several guarantee, in case of default of payment of the debtor, one or the other of the guarantors can be directly sued by the lender without going through the debtor first.