Personal guarantee

What is a personal guarantee?

it is most widely defined as a personal acceptance of
responsibility for the obligation of the debtor together
with debtor
Personal guarantee may occur:
1. so that creditor concludes an agreement with the
guarantor (the most common case)
2. directly under the statutory provision (everything
required for contractual personal guarantee applies
to this one – e.g. managers are personal guarantors
for their companies’tax debts if they caused them )
 Personal guarantee agreement
• Personal Guarantee Agreement is concluded
between the creditor from the main
transaction and a third party-guarantor,
• in which the guarantor undertakes to fulfill a
valid debtor's obligation
• if the debtor fails to return it alone at maturity
 Characteristics of personal guarantee
1. Guarantor personally takes responsibility for the
fulfillment of someone else’s liability, i.e. the debtor's
liability from the main transaction - it's a so called
personal reinforcement (insurance) of an obligatory legal
relationship);
2. A main legal transaction exists between creditor and
debtor (e.g. a loan agreement), and the guarantor only
accepts liability for the debtor’s fulfillment of the contract
to the creditor. By a Declaration of personal guarantee, the
guarantor acceedes to an already existing debtors’s debt
from the main contract – i.e. accessory character of
personal guarantee;
 Characteristics of personal guarantee

3. in case of contractual personal guarantee liability arises only

for guarantor and is said to be a one-sided-obligatory contract;
4. cumulation of debtor’s and guarantor’s liability occur towards
the creditor for the same debt – i.e. personal cummulation
when more than one person is liable for the same obligation;
5. the consent of the debtor (or notice) is not needed for
conclusion of the agreement on personal guarantee, even
though usually the debtor finds a guarantor. Because the
guarantor takes up the obligation towards the creditor in his
name for the debtor (that he would pay off the debtor’s debt
if he fails to do so), and not on behalf of the debtor (that he
will ensure that the debtor pays off the debt);
 EXCEPTIONS TO THE PRINCIPLE OF
ACCESSORITY of personal guarantee are:

1. The guarantor can warrant only for a part of the obligation or

commit under more favorable conditions than those that that are
granted to debtor from the main contract
2. If the debtor enters bankruptcy proceedings, in which claims of all
creditors to such debtor are comparatively reduced, guarantor’s
liability is not reduced and he is liable to creditor for the full
amount of the debtor's obligation
3. Successor/heir is liable for testator’s debts (e.g. if debtor dies) up to
the amount of the value of inherited assets. If creditorstill has
outstanding debts, he will be fully paid by the guarantor because
he warrants for the full amount of the liability of the debtor (the
deceased)
 What should be the form of the personal
guarantee agreement?
• The law stipulates that the contract of personal guarantee must
always be concluded in written form. If the statement of
personal guarantee is not given in written form, this personal
guarantee is void and has no legal effect

• In the statement of personal guarantee the guarantor must

clearly and unconditionally express
(a) that he wants to take up the obligation of personal guarantee,
and
(b) that the obligation of the debtor for which the personal
guarantee is given is determined or at least determinable (e.g.
the amount of debt, etc.).
 Who can be the guarantor?
• Guarantor may only be a person who has full business
capacity, reason - protection of property of such
persons (persons with limited business capacity such
as minor over 14 years, and a person who is partially
deprived of legal capacity can not be guarantors not
even through legal representatives)
• If the debtor has limited/no business capacity, the
guarantor will be liable to creditor as if he personally
guarantees for a person who has full business capacity
- an exception to the principle of accessority of
personal guarantee!
 What could be the object of personal
guarantee?
Debtor’s obligation that is guaranteed for:
• it can be any obligation (act, giving, failure to act, enduring or even compensation
for damages, in practice the most common are financial obligations of debtor to
the creditor)
• must be valid, i.e. that it is possible, determined or determinable, and permitted
(legally and morally)
• obligation of the debtor from the main transaction already exists, but personal
guarantee for an obligation whose fulfillment depends on the performance of
some future uncertain fact (i.e. with suspensive condition) or for the obligation
that exists at the time of the conclusion of the personal guarantee but only lasts
until the occurrence of any future fact (i.e. with the abrogative or resolutive
condition).
• When the guarantor guarantees for a future obligation of the debtor but a
deadline is not given when in the future such an obligation should arise, the
guarantor may revoke his personal guarantee at any time until such obligation
occurs
 Types of personal guarantee
• Subsidiary personal guarantee
(creditor must first seek the fulfillment of the obligation from the principal debtor, and if he
does not fulfill his obligation, only then may the creditor require fulfillment of the obligation
from the guarantor)
• Solidary personal guarantee
(the creditor has the right to choose immediately whether he will require the fulfillment of
obligation from the main contract either from the debtor or guarantor. Positions of such
guarantor and debtor are equal – such guarantor a.k.a. guarantor-payer)
• Joint personal guarantee
(more guarantors warrant for the obligation of the debtor from the main contract, all such
guarantors are called together ”joint guarantors")
• Subpersonal guarantee
(when another guarantor warrants to the debtor for an obligation of the first warrantor, that
is a situation of guarantor’s -guarantor)
• Liability for payment of compensation
(contract between guarantor and the third person (referred to as the guarantors for payment
of damages) in which the third person undertakes to compensate the damage to the
warrantor who has fulfilled the debtor’s obligation from a main job, if the latter fails to settle
his claim from the debtor)
 Types of personal guarantee!
Regular or subsidiary personal guarantee
• the rule is that a creditor may demand a compensation for an
obligation from the guarantor only if he previously unsuccessfully
attempted to settle from the debtor.
• There are two exceptions to this order of priority in the settlement
of creditor’s claim:
1. If it is obvious that fulfillment of debtor’s obligation can not be
achieved from his assets, creditor may seek settlement of
obligation from the guarantor even if he has not previously tried to
settle from debtor
2. if the debtor has gone bankrupt creditor may seek settlement of
obligation from guarantor (even if he has not previously attempted
to settle from the debtor).
 Solidary personal guarantee!
• when guarantor-payer settles debtor’s obligation,
he has the right to reclaim what he has paid from
the debtor - i.e.right of recourse
• creditor will prefer to accept solidary rather than
subsidiary personal guarantee because it provides
easier realization of obligation
• In commercial contracts where the type of personal
guarantee is not expressly indicated, it is assumed
that solidary personal guarantee was agreed
 Joint personal guarantee!
More than one guarantor:
• The interrelation of individual guarantors depends on the content
of their personal guarantee agreement with creditor - it can be a
subsidiary or solidary personal guarantee.
• legal presumption is that the liability of all joint warrantors and
debtors is solidary if nothing else is specified in the personal
guarantee agreement,
• Each joint guarantor who settles a debtor’s obligation takes over
creditor’s right against the debtor - that is personal subrogation!
• According to the principle of personal subrogation such joint
guarantor can collect from the debtor everything he paid to the
creditor, and if he fails to collect, he can ask all the other joint
warrantors to pay him a proportional part of debt.
 Subpersonal guarantee
• creditor may seek settlement from
subguarantor only if he fails to settle from
debtor or the first warrantor – this is due to a
subsidiary position of subguarantor.
• subguarantor, who fulfills the obligation as the
guarantor, has a right of recourse, i.e. refund
from debtor and other guarantors for what he
paid the creditor
 RELATIONSHIP BETWEEN creditor and the
guarantor - continued
• Due to principle od accesority guarantor’s obligation can not be
larger in scope and quality from debtor’s obligation at the time of
personal guarantee negotiation- BUT .....

• Guarantor’s obligation may increase if the debtor is late in fulfilling

his obligations or for any other reason which occurred by debtor’s
fault (for collection costs, contractual penalty, interest, etc.) and to
the extent that the debtor’s obligation has increased.
• If a debtor's obligation is subsequently reduced, guarantor’s
obligation will also be proportionately reduced.
• For subsequently increased obligation or additional requirements
parties should expand the existing or agree on a new personal
guarantee in writting
 RELATIONSHIP BETWEEN creditor and the
guarantor - continued
• Our law prescribes duties for creditors in order to protect the interest of
the guarantor – which, if not fulfilled – may result in termination or
reduction of guarantor’s obligation or he may be entitled to recover
damages from the creditor.

• Such cases of negligent behavior of creditors could be:

1. If the debtor fails to meet his obligation on time the creditor is required to
notify the guarantor, otherwise he will be liable for damages caused to
guarantor because of increased liability of guarantor for e.g.: default
interest, collection costs, etc..
2. Guarantor may invite the creditor to seek fulfilment of debt upon accrual.
Guarantor shall be relieved of liability the creditor does not require
fulfillment from the debtor within one month from such invitation
because such behavior of creditor will be considered as negligent;
 RELATIONSHIP of creditor and guarantor -
continued
3. When the deadline for compliance has not been determined,
the guarantor is relieved of responsibility one year after
conclusion of personal guarantee agreement if the creditor
upon warrantor’s invitation within a month does not issue a
statement necessary to determine the date of fulfillment;
4. When the principal debtor goes bankrupt, the creditor is
obliged to report his claim in bankruptcy and notify the
guarantor, or he will be liable for the damage to guarantor;
5. If the creditor abandons his deposit right or lien or any other
right which warranted the repayment of his claims or he loses
it by his fault and thus disables the transfer of such right to the
guarantor, the guarantor is relieved of his obligations to the
creditor.
 RELATIONSHIP of creditor and warrantor -
continued
• In the event of creditor’s claims against the
guarantor to fulfill the obligation that the debtor
has not fulfilled
• guarantor has the right to submit all objections
• relating either to relationship creditor-debtor
(e.g.: forgiveness, debt fulfillment , offsetting, the
statute of limitations, etc..) or
• creditor-guarantor (e.g.: objection order of
priority in subsidiary personal guarantee)
 Relationship of debtor and guarantor
• When a guarantor fulfills debtor's obligation to the creditor from
the main transaction the personal guarantee agreement between
the creditor and the guarantor ceases, and

• Creditor’s legal claim is transfered to the guarantor to the extent

that the guarantor has fulfilled the debtor's obligation to the
creditor (including all ancillary rights and other means of
insurance) – this results in statutory personal subrogation of the
guarantor into the position of creditor and

• from then onwards, the debtor must fulfill his obligation to the
guarrantor and no longer to the creditor
 Right of recourse
When the guarantor fulfills the obligation to the creditor,
guarantor may get settled from debtor, i.e. he has the right of
recourse towards the debtor for:
1. all amounts that guarantor paid to the creditor on behalf of
the debtor
2. Statutory penalty interest on all amounts paid from the
date of payment
3. costs of dispute between debtor and creditor for debt
collection
4. damage compensation if it was caused due to debtor's
delay or his fault
 Loss of right of recourse
• guarantor may lose the right to compensation
for what he paid the creditor in 3 cases, :

1. If the guarantor paid the creditor's claim

without the knowledge of the debtor,
– such debtor can use all legal remedies against the
guarantor with which he could have refused
creditor’s request at the time of settlement
 Loss of right of recourse
2. If in such a case guarantor paid the creditor's claim, and
did not inform the debtor and the debtor not knowing
the claim was settled paid it again, the guarantor cannot
require the debtor to reimburse what he paid, but has
the right to demand back from the creditor what he
paid

3. The guarantor who, without the debtor's knowledge paid

the creditor's claim which was later canceled or
extinguished by compensation upon debtor’s claim may
only require the creditor for refund.
Termination of personal guarantee
1. Due to any cause which leads to termination of debtor's liability
(e.g.: debt relief, fulfillment, offsetting, cancellation of main
contract, etc.)

2. any causes that lead to the termination of obligations from

personal guarantee (even if the debtor's obligation remains but
the personal guarantee is agreed on more favorable terms than
the principal debt) e.g.: if the deadline of personal guarantee
passes or by debt relief for guarantor etc.;

3. any cause which leads to nullity or voidance of the contract of

personal guarantee;
Termination of personal guarantee
4. by prescription of debtor's liability, guarantor’s liablity is
prescribed as well (it is not automatically terminated, but
due to the principle of accessority of personal guarantee,
the guarantor may refuse the creditor to fulfill the
prescribed obligation of the debtor);

5. when the prescription deadline for obligation of the main

debtor is longer than two years, the obligation of the
guarantor prescribes two years from the maturity of the
debtor’s obligation, except when the guarantor has
solidary liability with the debtor.
 Simmilar legal institutes
• The personal guarantee has similarities with:

• bank guarantee
• assumption of debt
• accession to debt
• taking over of fulfillment
 BANK GUARANTEE
• ORA defines a bank guarantee as any obligation to pay a
sum of money upon the written request of the user and
upon submission of documents to the bank (article. 1,039
ORA).

• Bank guarantee is always an independent obligation that

the bank takes over towards the beneficiary of the
guarantee, it is independent from the main contract and
does not have accessory character like the personal
guarantee agreement which depends entirely on the main
contract.
 BANK GUARANTEE
• with release of the bank guarantee, the bank carries out its
independent obligation on its own terms, in contrast to a personal
guarantee agreement in which the warrantor's liability depends on the
obligation of the principal debtor.

• Bank guarantee is any such obligation to which the bank commits itself
regardless of its name, and the object of such a personal guarantee is
always money. With other conventional warranties the object may be
any performance, giving, suffering, refraining to act and damages.

• the bank guarantee is only a specific, but separate form of plain classic
warranties which has developed throughneeds in practice.
 Payment guarantee – takeover of debt
• according to our law with the Agreement on takeover of
debt, a third-person or debt acquirer assumes the debtor’s
debt from a transaction, with the consent of the creditor.
This is actually a change of debtor !!!

• Debt acquirer takes up the obligation towards the debtor

that he will take over his debt if the creditor agrees to it. By
takeover of debt the obligation of the former debtor stops
and his obligation from the main contract is terminated. The
debt acquirer steps in his place and into the same
commitment that has long existed between the former
debtor and creditor.
 Payment guarantee – takeover of debt
• guarantor takes over the debt of the debtor rather
than acceeds to the debt, but the debtor’s obligation
remains (primarily) to repay his debt to the creditor.

• If - at the time of creditor's consent to an agreement

on debt takeover – the acquirer was insolvent, and the
creditor did not know it or should not have known, the
former debtor is not relieved of liability and
Agreement on debt assumption has the effect of a
contract for debt accession
Payment guarantee – accession to debt
• With the contract to access the debt a third person
commits to the creditor that he will, in addition to the
debtor (i.e. solidarily with him), settle the obligation of the
debtor to the creditor.

• In this way such third person actually becomes a co-debtor.

• In case of accession to debt, the third person is always

liable solidarily with the debtor to fulfill the obligations of
the debtor
Payment guarantee – accession to debt
• When accessing the debt third party-acceder to
debt has no legal right of subrogation or has no
legal right to demand from the debtor what he
has paid the creditor after he settles the debt.
• As long as the creditor does not give its consent
to the agreement on debt assumption or as
long as he refuses to give consent, Agreement
on debt assumption has only an effect of the
takeover of contract fulfillment !!!
Payment guarantee – accession to debt

• A special case of access to debt in case of

purchase or takeover of some material entity
(i.e. Companies, etc..). In such a case, the
person to whom the property is transfered in
whole or in part will be liable for the debts in
addition to former holders of rights and in
solidarity with him, but only up to the value of
its assets - a cogent provision!
 Payment guarantee – taking over of
fulfillment
• When taking over the fulfillment of a debtor’s obligation
the third party and the debtor close a contract in which
the third party agrees to fulfill debtor’s obligation to the
creditor.

• In this case the third party has a relationship with debtor

only. He does not take over the debt or acts as co-debtor

• Therefore, the debtor remains in obligatory legal

relationship with the creditor from the main contract.
 Payment guarantee – taking over of
fulfillment
• If the third party fails to fulfill the obligation of the debtor to
creditor, the creditor can not ask her to do so because she is
not in any relationship with the creditor (but only with the
debtor).

• Therefore, the creditor may again refer to the fulfillment of

the obligation only to its debtor.

• Debtor, however, is entitled to recover damages from such

third party if she does not fulfill the obligation of the debtor
as it committed under the contract.
Thank you!

Marjeta Tomulić Vehovec, PhD

mvehovec@zsem.hr