How to defend yourself as an executive guarantor?
You are the director of a company and you have acted as guarantor to secure your company’s debts with a banking institution. But your company’s financial situation has deteriorated and you are at risk of being pursued by the bank to repay the amounts owed. What are your means of defence as an executive guarantor? What are the conditions to benefit from the over-indebtedness procedure? What are the risks if you cannot pay?
Means of defence for the executive guarantor
As an executive guarantor, you have several means of defence to challenge the validity or the amount of your commitment, or to oppose the enforcement of the guarantee by the bank. These means of defence must be exercised within the applicable limitation periods, which are generally five years from the date the debt becomes due or from the date of the first unresolved payment default.
- The first means of defence consists of verifying the regularity of the guarantee contract. Indeed, the guarantee contract must comply with certain mandatory provisions. If these provisions are absent or incomplete, the guarantee contract is void and you may ask the court to release you from your obligation. These mandatory provisions differ depending on the date the guarantee was entered into.
Guarantees entered into before 1 January 2022 must comply with the provisions required by the former Article L.331-1 of the French Consumer Code, which applies to any individual guarantor, experienced or not, involved in civil or commercial guarantees (Cass. Com., 10 January 2012, No. 10-26.60). Only errors affecting the guarantor’s consent can void the guarantee commitment. For guarantee commitments made after 1 January 2022, the French Civil Code introduced the new Article 2297 which replaces the previous requirements, abolishing the mandatory form, which could lead to an increase in errors affecting consent. Finally, without specific clauses, a guarantor cannot be subject to the benefits of division and discussion.
- The second means of defence consists of invoking the disproportionate nature of your commitment. Indeed, the bank has an obligation to verify that the executive guarantor has sufficient income and assets to meet their commitment at the time of entering into the guarantee contract. If your commitment was manifestly disproportionate to your financial capacity, you may ask the court to limit or void your obligation, depending on the date the guarantee was entered into.
It is the income at the time of signing that must be taken into account to assess disproportionality (Cass. com., 6 Jan. 2021, No. 18-25.945; Cass. com., 23 Oct. 2019, No. 18-17.024) and the proportionality of the guarantor’s commitment cannot be assessed with regard to the expected income from the guaranteed transaction (Cass. 1st civ., 3 June 2015, No. 14-13.126, Bull. 2015 No. 6, I, No. 128; Cass. 1st civ., 3 May 2018, No. 16-16.444). Furthermore, disproportionality must be assessed taking into account the guarantor’s overall indebtedness, including that resulting from guarantee commitments (Cass. com., 22 May 2013, No. 11-24.812, Bull. 2013, IV, No. 84; Cass. 1st civ., 15 Jan. 2015, No. 13-23.489, Bull. 2015, I, No. 8). In addition, the disproportionality of the guarantor’s commitment must be assessed by taking into account the net value of their assets (Cass. com., 7 Oct. 2020, No. 19-13.135).
- The third means of defence consists of asserting the defences available to the principal debtor. Indeed, the executive guarantor may raise against the bank all defences that could have been raised by the guaranteed company, such as limitation, set-off, debt forgiveness, nullity of the loan agreement, mistake, fraud, force majeure, etc. (Art. 2298 of the French Civil Code). If you can demonstrate that the company was not obligated to pay the bank, you may ask the court to release you from your obligation.
For example:
The amount of the debt:
The guarantee is ancillary and cannot exceed the amount of the guaranteed debt. Nevertheless, it happens that bank collection departments fail to take into account partial payment of the debt by another joint and several guarantor or the existence of interim payments.
In the context of insolvency proceedings:
2.1 The bank must file its claim in the insolvency proceedings. If the supervisory judge finds an irregularity in the claim filing and rejects it, the debt would be extinguished. As an ancillary guarantee, the guarantor’s obligation would also be extinguished.
Limitation period for the guarantor (Art. L 110-4 of the French Commercial Code):
The bank has five years from the first missed payment by the principal debtor to bring legal action against the executive guarantor (pursuant to Cass. Civ 1, 6 November 2017, No. 16-15.331).
After this period, the bank’s claim would be time-barred and therefore inadmissible.
You may also invoke the benefit of discussion, which allows you to require the bank to pursue the company first before claiming payment from you, unless you have expressly waived this right in the guarantee contract.
Other means of defence:
Failure to send information notices
Article 2302 of the French Civil Code requires the banking institution to send an annual information notice to the guarantor no later than 31 March of each year, which must indicate the amount of principal and interest, commissions, fees, and ancillary charges remaining as of 31 December of the preceding year in respect of the obligation covered by the guarantee, as well as the term of this commitment.
If the bank cannot prove that it has duly provided the annual information, it forfeits its right to the interest accrued from the last communication until the new information is provided. In the meantime, repayments made by the debtor are deemed to be applied first to the principal of the debt in the relationship between the guarantor and the bank.
Nullity or compensation in the event of vitiated consent in the presence of an OSEO (BPI) guarantee
The OSEO Guarantee, now integrated into the French Public Investment Bank (BPI), allows businesses to have better access to credit by securing a portion of their debts in the event of default. However, neither the borrower nor the guarantors may rely on this guarantee. As a result, some banks omit to disclose the details of the OSEO guarantee to guarantors in order to make them believe that their liability is reduced. The legal consequence of this withholding of information depends on the guarantor’s level of knowledge: it may result either in nullity of the guarantee contract or in compensation through damages.
The guarantor married under a community property regime
If one of the spouses married under a community property regime did not give their consent, this may render the guarantee unenforceable against that spouse. Consequently, forced recovery of the debt from community property cannot be carried out in the case of a guarantee.
Nullity of the guarantee in the event of novation of the loan agreement
If the principal guaranteed obligation is modified without the guarantor’s consent (for example, following a merger or a sale), the guarantee may be declared void due to the failure to obtain the guarantor’s renewed consent (see in particular French Court of Cassation, Commercial Chamber, 24 June 2014, Appeal No. 13-21074).
Conditions to benefit from the over-indebtedness procedure
If you have no means of defence or if they are rejected by the court, you may attempt to benefit from the individual over-indebtedness procedure, which allows for the suspension of creditor proceedings and obtaining a recovery plan or a discharge of your debts.
To do so, you must meet the following conditions (Art. L. 711-1 of the French Consumer Code):
- you must be a natural person;
- you must be acting in good faith, meaning you must not have entered into your guarantee with the intention of defrauding your creditors or concealing your assets;
- you must be manifestly unable to meet all of your non-professional and professional debts, both due and to become due;
- you must reside in France or have the centre of your interests in France.
If you meet these conditions, you must file with the over-indebtedness commission in your department by submitting a complete file including, in particular, your identity, the list of your creditors, the amount of your debts, the value of your assets, the amount of your income and expenses, etc.
The over-indebtedness commission will examine your file and decide on its admissibility. If your file is deemed admissible, the over-indebtedness commission will carry out an assessment of your situation and propose a consensual recovery plan, which sets out the terms for repayment of your debts over a maximum period of 7 years. If you and your creditors accept this plan, it will be approved by the court and must be complied with by all parties.
If your file is deemed inadmissible, you may challenge this decision before the district court within 15 days of its notification.
Risks if you cannot pay
If you cannot benefit from the over-indebtedness procedure or if it fails, you remain liable to pay your guarantee debt to the bank. If you do not pay, the bank may initiate legal proceedings against you and obtain an enforcement order (judgment, order, payment injunction, etc.) enabling it to seize your assets and income.
The bank may in particular proceed with:
- an attachment of your bank accounts, which will freeze the available funds up to the amount of the debt;
- a seizure and sale of your movable property, which will result in the auction of your personal belongings;
- a seizure of your primary or secondary residence, which will result in the forced sale of your real property;
- an attachment of earnings, which will deduct a portion of your professional or replacement income.
These enforcement measures can have serious consequences on your personal and family situation. It is therefore important to act quickly if you are faced with a payment demand from the bank as an executive guarantor. You can contact Maitre Le Bot, a banking law specialist, who will help you assert your rights and find the best solution to overcome your indebtedness.
