Guarantors and Contracts of 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 case of his default.
The person providing the guarantee is called guarantor and the person in respect of whom the guarantee is provided is the principal debtor. The person to whom the guarantee is provided is called the creditor. A simple example of a contract of guarantee is where by the guarantor undertakes towards the creditor (i.e. a bank) responsibility that he will pay the debt if the principal debtor does not repay as agreed the loan received.
In a typical loan agreement with the bank,the guarantor states that he shall be responsible 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, once any installment of the loan becomes overdue.Therefore, if the principal debtor fails to meet his agreed obligations towards the bank, then the guarantor owes equal obligations as the principal debtor in terms of paying off the debt.
Therefore, financial institutions/banks may proceed with the filing of a suit both against the principal debtor and his guarantor(s) and obtain a court judgment, jointly and severally against all of them as co-defendants. This means that if for example, one of them has gone bankrupt or cannot in any way afford paying the debt, the bank may proceed with enforcement and execution measures of the judgment in hand against the rest of them to recover the judgment debt.
Every guarantor should be aware that, according to the aforesaid Contract Law, there are various forms of defence and accordingly the particularities of his case need to be examined.
Defences available to a guarantor- When can a contract of guarantee be declared void?
There are circumstances under which a contract of guarantee could be declared void and of course under Contract Law, when a contract is void then the person who has gained any benefit under the said agreement or contract is under the obligation to restore such benefit or to pay damages to the person from whom such benefit was received. Amongst these circumstances 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.
Circumstances under which a guarantor may be discharged
Alongside the aforesaid defences that a guarantor may raise, Cyprus legislation enacted special defences for guarantors under which they are automatically discharged of their obligations under the contract of guarantee.
Pursuant to Contract Law, a guarantor may raise these defences for automatic discharge 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 to give the principal debtor time to pay (e.g. loan restructuring).
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, if the agreement extending the time of completion by the principal debtor is made between the creditor and a third party, instead of the principal debtor, the guarantor is not discharged.
In addition, 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.
The Protection of a Specific Category of Guarantors Law No. 197 (I)/2003
The Cyprus Parliament has enacted the Protection of a Specific Category of Guarantors Law (197(I)/2003) which applies only in the event where the guarantor is a natural person, who with the contract of guarantee guarantees to a creditor to perform the promise/obligations of payment of the whole or part of the amount of the loan, in the event of non-performance by the principal debtor to whom the loan is granted. It should be highlighted however, that the said 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.
Under the Protection of a Specific Category of Guarantors Law (197(I)/2003), the same remedies, defences, rights and obligations apply as in the Contract Law (some of which are mentioned hereinabove).
Under the same Law, there are circumstances which may be regarded as an alienation of the assets of the principal debtor for which the guarantor may seek protection. The principal debtor is regarded to be alienating his assets when he does so without allowing adequate assets onto 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 (relative) in the form of a gift, except in the event whereby the transfer is executed in good faith and logically for education or medical purposes or for the basic needs of the principal debtor’s family etc.
In such cases the guarantor may, with a claim filed into court or with an interim application or a statement of defence or an opposition in the parameters of a pending action or via a procedure for measures of execution or an application for the issue of a receiving order procedure from the creditor against the guarantor, in relation to the contract of guarantee, the guarantor may seek and secure a final or interim order prohibiting the principal debtor from executing a specific proposed alienation of assets or a declaratory judgment or order declaring any already executed alienation by the principal debtor as void.
Further, the 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 promise/obligation arising under the loan. Otherwise, the creditor is deemed to have failed to meet its statutory obligations towards the guarantor, to the point that the latter can be released from his obligations.
Therefore, if the creditor commits any act incompatible with the rights of the guarantor or omits to take an action as required by the Law in question, so that the rights of the guarantor against the principal debtor are overlooked, then the guarantor is released from his responsibilities to the bank.
An important provision in the above named legislation is that the guarantor, upon a Court hearing in an action against him (only) or against him and the principal debtor (together) or the existing co-guarantors for debt recovery, may submit to the Court a request for suspension of payment, provided that he satisfies the Court with relevant evidence that the principal debtor has the financial ability to pay off the loan.
It should be noted that the Protection of a Specific Category of Guarantors Law (197(I)/2003) 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 granted before the named legislation.
The Insolvency of Natural Persons (Personal Repayment Plans and Debt Exemption Decree) Law (No. 65(I)/2015)
The above Law includes provisions regarding the handling of guarantors, who are defined as natural persons.
The Insolvency of Natural Persons (Personal Repayment Plans and Debt Exemption Decree) Law (No. 65(I)/2015) prohibits credit institutions to instigate legal or any other proceedings against the guarantor who is a natural person if the following requirements are met:
1. 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.
2. 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.
3. The loan is secured with a mortgage on the main residence of the principal debtor.
It should be noted that the regulation only applies for non-performing loans at the date of the application of the law and shall not apply in any other case.
In case of loans granted to principal debtors with the security of a mortgage, the guarantors are protected with regards to the amount of their liability.
Their liability is limited only to the amount which shall result and remain outstanding in accordance with the loan, after having taken specific performance measures against the security of mortgage that the Bank has on the property, meaning that the Bank owes to proceed first with the alienation of the mortgaged property.
The guarantors named in the proof of debt shall only be liable for the difference in amount resulting from the balance of the debt minus the market value of the property constituting the security (if any). Therefore, the creditor's right to collect from the guarantor is limited to the difference in amount, which is the maximum amount that can be recovered by the guarantor (i.e. if the property that is subject to security is estimated at €80,000 and the loan amounts to €100,000, the liability of the guarantor limited to €20,000). If the balance of the loan is less than the determined market value of the secured property, then the creditor cannot take any action against the guarantor (i.e. if the property that is subject to security is estimated at €100,000 and the loan amounts to €90,000, the creditor cannot take any measures against the guarantor).
In case of a disposal of a secured property for an amount greater than the amount of the determined market value of the secured property, the secured creditor may take action against the guarantors only for the difference between the price of the disposal and of the debt. If any amount has been already paid by the guarantor, such amount will be refunded accordingly (i.e. if the loan amounts to €100,000, the value of the secured property is €80,000 and the guarantor pays €15,000 out of the €20,000 that he himself is liable to pay, then if and when eventually the secured property is sold at a later stage for €90,000, then the guarantor shall receive a refund of €5,000) or the creditor will not be able to seek for the whole amount of the said difference in amount as had originally been calculated, (but for the difference amount resulting in relation to the net amount of the disposal of the secured property, i.e. if the property was sold for €90,000, the guarantor will pay €10,000).
The ability of the creditor to file a suit against a guarantor is limited to 2 years after the date on which the Personal Repayment Plan would be implemented. After the end of such period, the creditor will not be allowed to go against the guarantor and any rights of the creditor against the guarantor cease.
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 and the guarantor’s right to file a suit against the principal debtor or his co-guarantor, is limited to 3 years from the day that the guarantor repays the outstanding balance of the loan on behalf of the principal debtor. Each guarantor is kept informed by the insolvency consultant regarding the principal debtor’s ability to pay his debts.
It should be noted that each guarantor of a determined debt is summoned to attend to 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.
Relevant article in relation to the personal repayment plans can be found in the link below: