Current account guarantees: a complete guide and legal issues

Table of contents

Guarantees for partners' current accounts or bank overdrafts are one of the most complex personal sureties in commercial law. It lies at the crossroads of several legal approaches: that of guarantees, that of current accounts and, frequently, that of insolvency proceedings. For company directors or individual guarantors, committing to cover the balance of a current account represents a major risk that is often poorly understood. The purpose of this article is to summarise the essential mechanisms of this guarantee, covering the key stages from its formation to its extinction. For a study of fundamental mechanisms and pitfalls of surety bonds in general or impact of insolvency proceedings on this type of guaranteededicated articles are available. The complexity of these commitments means that assistance from a lawyer competent in bond matters often indispensable.

Introduction: understanding current account guarantees

What is a current account guarantee?

A current account guarantee is a contract under which a person, the guarantor, undertakes to a creditor, usually a bank, to pay the debt of the account holder (the principal debtor) if the latter fails to honour its commitments. What makes it special is the purpose of the guarantee: the potential debit balance of a current account. Unlike a traditional loan, where the amount is fixed, the balance on a current account changes constantly, making it particularly difficult to assess the risk. This guarantee is essential for banks that grant overdraft facilities or overdrafts to businesses, but it is also the most elaborate and riskiest of personal sureties.

Combining the logic of guarantees, current accounts and commercial law

The difficulty with this mechanism arises from the superimposition of several legal frameworks. First of all, the rules governing guarantees must be applied, which are based on the principle of accessory liability: the guarantor's commitment follows the fate of the principal debt. Secondly, we need to take into account the specific features of current accounts, a banking practice in which reciprocal debts are offset and merged, and in which the balance is in principle not due until the account is closed. Finally, the law governing companies in difficulty frequently upsets this balance, particularly when the principal debtor is the subject of safeguard, reorganisation or liquidation proceedings.

Scope: companies and bank accounts

Current account guarantees mainly concern businesses in the broadest sense, whether they are trading companies, craftsmen, farmers or even the self-employed. The aim is to guarantee credit linked to an economic activity. Although our analysis focuses on current accounts held by credit institutions, the principles identified can be applied to other types of accounts, such as those managed by factoring companies. The guarantor is often a natural person, usually a manager, who commits his or her personal assets to the transaction.

Formation and termination of a current account guarantee contract

Essential advance information from the guarantor

Before signing, the future guarantor is entitled to clear and fair information from the bank. If the account is already in debit at the time of signing, the creditor is obliged to bring this information to the attention of the guarantor. Failure to comply with this duty of good faith may constitute fraud, which could render the guarantee null and void. More commonly, if the bank does not prove that it correctly informed the guarantor of the pre-existing overdraft, the latter's commitment may be reduced accordingly. In the absence of precise information, the guarantor is entitled to believe that the account has a zero or credit balance.

Account allocation and closure forecasts: issues for the guarantor

The liability of the current account guarantor is subsidiary: it cannot be invoked until the account is closed, at which point the balance becomes a definite and payable debt. The parties to the current account agreement (bank and debtor) are free to agree specific rules for charging discounts. However, these agreements must not be implemented in fraud of the guarantor's rights. For example, systematically applying discounts to a debt that has not been guaranteed in order to artificially maintain the debit on the guaranteed account could be considered an unfair manoeuvre on the part of the creditor, for which he would be liable.

Key terms of the guarantee contract: limits and duration of the commitment

The deed of guarantee must precisely define the terms of the commitment. Since the reform of the law on sureties, the law requires guarantors who are natural persons to include certain mandatory details, on pain of nullity, in particular the limit of the amount guaranteed in principal and ancillary sums. Interest is payable by the guarantor only if expressly provided for. The undertaking may be for a fixed term, in which case it ceases on the due date, or for an indefinite term. In the latter case, the guarantor has the right to terminate the guarantee at any time for the future. The outline of recent reforms to surety bonds and their impact have tightened up the formalities to protect the guarantor.

Functions inherent in a current account guarantee

The dual nature of the guarantor's obligations: coverage obligation and settlement obligation

The guarantor's commitment breaks down into two distinct obligations. The first is the covering obligation: this corresponds to the period during which the guarantor guarantees future debts arising on the account. It ceases when the guarantor terminates his commitment or at the end of the contract. The second is the settlement obligation: this corresponds to the actual payment of the debt existing when the cover ceases. This settlement obligation survives the cover obligation and will only be extinguished by payment of the final debit balance or by the effect of subsequent remittances.

Termination of the guarantee and continuation of the account: the impact of subsequent discounts

A fundamental principle, enshrined in case law ("Bard" ruling of 1972), protects the guarantor after the end of his commitment. When the guarantor has terminated his obligation to provide cover (by cancellation, for example) but the current account continues to operate, all sums credited subsequently to the account are deducted from the debit balance existing on the day the guarantee is terminated. The effect of this mechanism is to progressively reduce, or even extinguish, the guarantor's obligation to pay. Each remittance reduces the final debt that the guarantor may have to pay.

The bank's obstructionist tactics: the limited-effect termination clause

To counter this extinctive effect, banks have devised specific clauses. One of the best known is the "limited-effect termination clause". It stipulates that if the commitment is terminated, the guarantor remains liable for the balance outstanding at that date, without any deduction for subsequent discounts. The effect of such a clause is to 'freeze' the guarantor's debt and neutralise the protective mechanism of subsequent discounts. The validity of such clauses is accepted by case law, but it is subject to the condition that the guarantor has been fully informed of the scope of this undertaking, which derogates from ordinary law, and has consented to it with full knowledge of the facts.

The complexity of current account guarantees, particularly when faced with banking strategies or company difficulties, requires constant vigilance. For an in-depth analysis of your situation and an appropriate defence strategy, it is essential to consult a legal advisor. lawyer specialised in surety law. Our firm is at your disposal to assess your commitments and protect your interests, particularly if there are collective proceedings are being considered.

Frequently asked questions

What distinguishes the coverage obligation from the settlement obligation?

The cover obligation is the period during which the guarantor guarantees the debts arising on the account. The settlement obligation is the actual payment of the debt existing at the end of the cover; it may be reduced by the discounts credited to the account after that date.

What happens if I revoke my commitment as a guarantor for an indefinite period?

Your obligation to cover the new debts ceases. However, you are still obliged to pay the debit balance existing on the day of revocation, but this debt will decrease as future credits are added to the account, unless otherwise agreed.

Does the bank have to inform me of the debtor's situation before I make a commitment?

Yes, the professional creditor has a duty of loyalty and must inform you of any significant pre-existing overdraft on the account. Failure to do so may result in the nullity of your commitment or the reduction of your debt.

Can a clause prevent me from reducing my debt through subsequent discounts?

Yes, certain clauses, known as "limited-effect termination clauses", may provide that the balance on the day your commitment ends is frozen. The validity of such clauses is accepted, but requires your informed consent.

Is a current account guarantee more risky than another guarantee?

Yes, because the guaranteed debt is not fixed but evolving. The risk is more difficult to measure than for a loan of a defined amount, and the balance can deteriorate rapidly.

Am I released from my commitment if the principal debtor enters into insolvency proceedings?

No, the opening of insolvency proceedings does not automatically put an end to your commitment. On the contrary, it is often at this point that the bank turns against the guarantor, although specific rules apply to suspend or adjust the proceedings, particularly for guarantors who are natural persons.

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