A guarantee for a company's current account is a common guarantee, often seen as a mere formality by the directors or close relations who sign it. However, when the company encounters financial difficulties and is the subject of collective proceedings, the guarantor's situation suddenly becomes precarious. Far from being a simple moral commitment, this act has rigorous legal effects that are often overlooked. The aim of this article is to detail the specific impact of insolvency proceedings on current account guarantees, a technical mechanism at the heart of many complex situations. For an overview, please see the complete guide to current account guaranteeswhich lays the foundations for this commitment. In this section, we will look at the complex interplay between the law of security and the law of contract. general rules governing guarantees in insolvency proceedings.
Introduction: the impact of insolvency proceedings on current account guarantees
The opening of safeguard, reorganisation or liquidation proceedings in favour of the principal debtor upsets the contractual balance. The key question is to what extent the guarantor of the company's debt is affected by this special regime designed to protect and reorganise the debtor's assets. The principle of accessory liability, which requires the fate of the guarantor to be linked to that of the principal debt, comes up against the specific aims of insolvency law.
The principle that a guarantor is not discharged despite the debtor's insolvency proceedings
The fundamental principle is clear: the opening of insolvency proceedings does not release the guarantor from his commitment. This solution is logical, as the very purpose of a guarantee is to protect the creditor against the debtor's default. To deprive the guarantee of its effects at the precise moment when it becomes useful would empty it of all substance. The law considers the protection afforded to the debtor (suspension of proceedings, suspension of interest, debt remission) as a personal exception that does not automatically benefit the guarantor. Collective proceedings are an exception to ordinary law, favouring only the principal debtor. Consequently, unless expressly provided for by law, the creditor retains the right to take action against the guarantor to obtain payment of the secured debt.
The 2021 reform and its clarifications for the situation of guarantors who are natural persons
The order of 15 September 2021 on the 2021 reform of security interests and insolvency proceedingshas made some important clarifications. The new article 2298, paragraph 2, of the Civil Code reverses the previous logic. It now provides that a guarantor may not rely on legal or judicial measures granted to the debtor as a result of his default, unless a special provision provides otherwise. This new rule strengthens the creditor's position. However, a major exception exists in the law governing companies in difficulty. Article L. 622-28 of the French Commercial Code provides for the suspension of proceedings against guarantors who are natural persons, until the judgment adopting the plan or ordering the liquidation. This specific protection, which has been maintained and confirmed, is an essential exception to the principle of rigour laid down by the reform.
Continuation of the current account after the insolvency proceedings have been opened
The opening of insolvency proceedings does not automatically result in the closure of the current account. By virtue of Article L. 622-13 of the French Commercial Code, current contracts are maintained. The current account agreement, being a contract of successive performance, therefore continues. This continuation has direct consequences for the guarantor's commitment.
No automatic revocation of the guarantee and freedom of cancellation
Since the current account is continued, the guarantee securing the balance is also continued. The opening of proceedings has no extinctive effect on the guarantee. The guarantor therefore remains liable for debts arising after the opening judgment, up to the limit of its commitment. However, this continuation does not deprive the guarantor of his rights. If the undertaking was given for an indefinite period, the guarantor retains the right to revoke it at any time. Such revocation does not release the guarantor from any debts that may have arisen in the past, but puts an end to the guarantor's obligation to provide cover for the future. The guarantor must be vigilant and, if he wishes to withdraw for the future, must notify the creditor of his decision without delay, in accordance with the forms set out in his contract.
The treatment of interest: an exception between debtor and guarantor
This is a technical point with significant financial consequences. Article L. 622-28 of the French Commercial Code stipulates that the opening of the insolvency proceedings stops the accrual of legal and contractual interest to the debtor. The purpose of this measure is to freeze liabilities in order to facilitate reorganisation. However, the same article explicitly states that this suspension does not benefit the guarantor. As a result, while the principal of the debt is frozen for the company, interest continues to accrue against the guarantor. This difference in treatment is a perfect illustration of the break with the principle of accessory in favour of the purpose of insolvency law. The guarantor may thus find itself having to pay a sum greater than that which would ultimately be owed by the principal debtor.
Cases of implicit revocation of the guarantee: deviation from the charge and change of identity
Apart from explicit revocation, a guarantee may be terminated implicitly in certain situations. One of these is what is known in the literature as "deviation in the charging of remittances". Normally, sums credited to the account after the opening judgment should be deducted from the previous balance, thereby reducing the guarantor's debt. However, in practice and in certain court rulings, it has been accepted that these remittances can be allocated as a priority to the payment of new debts arising for the purposes of continuing the business. Although such a mechanism favours the continuation of the business, it has the effect of freezing the guarantor's commitment to the balance as at the date of the judgment, thereby depriving the guarantor of the benefit of the rebates. Another case of implicit termination is a substantial change in the identity of the debtor or creditor, such as an unforeseen transfer of business. As the guarantor's undertaking is given *intuitu personae*, a fundamental change in the identity of the debtor or creditor terminates the obligation to provide cover for the future.
Termination of current accounts under insolvency proceedings
While continuation of the account is the principle, it is frequently terminated, particularly in the event of compulsory liquidation. This termination triggers the process of determining the guarantor's final debt.
Establishing a provisional balance and the deferred account mechanism
On the date of the opening judgment, the bank must declare its claim as a liability of the proceedings. For a current account, this claim corresponds to the debit balance at that date. However, this balance is "provisional", as the account has not yet been closed. As long as the account is in operation, this balance may change. We must also take into account the "deferred" balance of the account, i.e. transactions in progress that have not yet been booked (cheques not yet debited, bills of exchange in the course of collection). These transactions, although initiated before the judgment, will affect the balance and, consequently, the guarantor's obligation, even if their accounting treatment is subsequent. It is therefore in the guarantor's interest to ensure that all these transactions are correctly taken into account when determining its debt.
The impact of reversal on the guarantor's obligation
Reversal is the operation whereby a bank debits its customer's account for the amount of a commercial paper (bill of exchange, promissory note) that has been credited "except in good faith" but has not been paid. If this transaction takes place after the guarantor's coverage obligation has ceased but before the account has been closed, it may increase the debit balance and therefore the guarantor's commitment. Case law accepts this possibility, considering that the reversal is the regularisation of a previous transaction. The guarantor must therefore be aware that his exposure is not fixed and that unpaid bills delivered before the end of his guarantee may increase his final obligation.
The application of the theory of co-obligors and the peculiarities of insolvency law
The guarantor is a co-obligor alongside the principal debtor. Insolvency law contains specific rules that affect their situation. One of the most notable is the five-year time bar introduced by article 2319 of the Civil Code. This stipulates that a guarantor of a current account balance may no longer be sued five years after the "end of the guarantee". The purpose of this provision is to limit the risk to the guarantor, whose payment obligation could otherwise remain in abeyance until the account is closed at a very late date. The relationship between this time limit and the rules governing the suspension of proceedings and the interruption of the statute of limitations in insolvency proceedings is complex. It requires a careful analysis of each situation to determine whether the creditor's action is still admissible. These peculiarities show that the fate of the guarantor depends on an interaction between several branches of law, which makes legal expertise essential.
The situation of a current account guarantor faced with insolvency proceedings is fraught with pitfalls and technical subtleties. Between the continuation of the account, the fate of interest, reversal mechanisms and specific limitation periods, the risks of an unexpected worsening of the guarantor's commitment are real. A precise analysis of the guarantee deed and a detailed understanding of the applicable rules are essential if you are to defend your rights effectively. To obtain support from a lawyer specialising in surety bonds and assess your situation, contact our office.
Sources
- Commercial code
- Civil Code
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