A surety bond is the most widely used personal guarantee in business life. When a person acts as a guarantor for a company, he or she undertakes to reimburse the creditor if the principal debtor defaults. This practice, which is particularly common among company directors who guarantee their company's debts, was until recently governed by rules scattered between the Civil Code, the Consumer Code and the Monetary and Financial Code. Order no. 2021-1192 of 15 September 2021 has profoundly reformed this legal systemThe aim is to clarify and centralise the rules in the Civil Code.
This text considerably modifies the law governing surety bonds, in terms of the definition itself, the formalities required and the protection afforded to sureties. Let's take a look at the main changes that directly affect businesses, their directors and their creditors.
The definition and characteristics of surety bonds clarified
A new, more precise definition
The reform gives a modernised definition of suretyship in article 2288 of the Civil Code: "A suretyship is a contract by which a guarantor undertakes to pay the debtor's debt to the creditor in the event of the debtor's default". This wording, which is clearer than the previous one, explicitly presents suretyship as a contract and the guarantor as a contracting party in his own right.
The text also specifies that the guarantee "may be entered into at the request of the principal debtor or without any request on his part and even without his knowledge". This provision confirms that the guarantee is formed between the guarantor and the creditor, with the debtor not being a party to the contract.
A new marketing criterion
One of the major changes concerns the determination of the civil or commercial nature of the guarantee. Previously, whether a guarantee was civil or commercial depended on the guarantor's interest in the guaranteed transaction, a criterion that was a source of uncertainty. Now, under the new article L.110-1 of the French Commercial Code, "the law deems guarantees of commercial debts to be commercial acts".
This new criterion, based on the nature of the guaranteed debt, considerably simplifies the identification of the commercial nature of a guarantee. A guarantee for a commercial debt will always be commercial, regardless of whether the guarantor is a trader or not. Conversely, a guarantee for a civil debt will always be civil.
This change has a significant impact on:
- Jurisdiction (commercial court or civil court)
- Freedom of evidence (in commercial matters)
- The presumption of joint and several liability (applicable in commercial matters)
Joint and several surety bonds: welcome clarifications
Article 2290 of the Civil Code clarifies the various possible configurations of joint and several guarantees. Joint and several liability may be stipulated:
- Between the guarantor and the principal debtor
- Between guarantors only
- Between the guarantor, the debtor and the other guarantors
This clarification provides a better framework for the effects of joint and several liability, particularly as regards the benefits of discussion and division. Solidarity between the guarantor and the debtor deprives the guarantor of the benefit of discussion, while solidarity between guarantors deprives them of the benefit of division.
Formation and formalities of the guarantee: relaxation of the rules
The end of pre-formatted handwritten notes
The reform considerably relaxes the rules governing the form of guarantees given by natural persons. The new article 2297 of the Civil Code puts an end to the rigid system of literally pre-formatted handwritten statements. Previously, the omission of a word or a comma from the legal form could lead to the nullity of the undertaking.
From now on, the individual guarantor must simply affix a note (manually or electronically) indicating that he or she is the guarantor:
- That it undertakes as guarantor
- To pay the creditor what the debtor owes in the event of default
- Up to an amount expressed in words and figures
The important thing is that the statement clearly reflects the commitment made, without imposing a rigid formula.
The dematerialisation of surety bonds
Another significant new feature is the removal of the ban on the use of electronic form for guarantee documents. The amendment to article 1175 of the Civil Code now expressly authorises the creation of a guarantee by electronic means.
This development, which facilitates the remote conclusion of guarantees, is particularly welcome at a time when paperless transactions are on the increase. It follows the general trend towards the digitisation of legal documents, while maintaining guarantees of legal certainty.
Reducing formal litigation
These more flexible provisions should considerably reduce the number of purely formal disputes that have clogged up the courts. For years, many guarantors have had their commitments annulled because of minor irregularities in the wording of the particulars. Jurisprudence had already begun to move in a more flexible direction, which the reform now enshrines.
Protection of natural persons as guarantors: tightening of the rules
The duty to warn
The ordinance gives a legal basis to the duty to warn, which until now had been based solely on case law. Article 2299 of the Civil Code states that "the professional creditor is obliged to warn the guarantor who is a natural person when the principal debtor's commitment is unsuited to his financial capacities ".
Two points deserve attention:
- This duty applies to any individual guarantor, without distinction between informed and uninformed guarantors
- It relates only to the unsuitability of the undertaking to the principal debtor's situation, and no longer to the risk of excessive indebtedness on the part of the guarantor himself.
The penalty has also been clarified: the creditor is "deprived of his right against the guarantor to the extent of the prejudice suffered by the latter". This is not a nullity, therefore, but a reduction proportionate to the extent of the prejudice.
Proportionality of commitment: a new sanction
The principle of the proportionality of a guarantor's commitment has been maintained, but its sanction has been modified. Under article 2300 of the Civil Code, if a natural person's guarantee to a professional creditor was "manifestly disproportionate" at the time it was entered into, it is no longer null and void but "reduced to the amount for which he could have committed himself".
This more balanced approach replaces the previous "all or nothing" approach with a graduated solution that is better suited to specific situations. In addition, the ordinance abolishes the "better fortunes clause", which allowed the creditor to demand full performance of the guarantee if the guarantor's financial situation improved.
Standardised information requirements
The reform considerably simplifies the creditor's information obligations towards the guarantor. The numerous scattered texts have been replaced by two clear articles:
- Article 2302 requires the professional creditor to inform the guarantor annually of the amount of the secured debt.
- Article 2303 requires the guarantor to inform the guarantor as soon as the first payment incident is not remedied.
The penalty remains forfeiture of interest and penalties for the period concerned. The order makes it clear that these information costs are to be borne by the creditor and no longer by the debtor or guarantor.
The guarantor's defences restored
Accessory nature fully restored
The reform fully restores the ancillary nature of surety bonds, which had been undermined by restrictive case law since 2007. Article 2298 of the Civil Code now clearly states that "the guarantor may raise against the creditor all the defences, personal or inherent in the debt, that belong to the debtor".
This crucial provision allows the guarantor to invoke all the principal debtor's defences, including those that are personal to the guarantor (such as a defect in consent, prescription or set-off). It puts an end to the controversy in the case law that had created legal uncertainty to the detriment of guarantors.
The only limitation concerns "legal or judicial measures from which the debtor benefits as a result of his default", such as grace periods, which the guarantor cannot invoke unless otherwise stipulated.
Traditional benefits clarified
The traditional benefits of discussion and division have been clarified:
- The benefit of discussion (art. 2305) allows the guarantor to require the creditor to sue the principal debtor first.
- The benefit of division (art. 2306) authorises a guarantor to request that the creditor divide the proceedings between all the guarantors.
The Order clarifies the conditions for applying these benefits and makes it clear that a guarantor who is jointly and severally liable with the debtor cannot invoke the benefit of discussion, but that guarantors who are jointly and severally liable with each other (and not with the debtor) can still benefit from division.
Methods of extinguishing surety bonds clarified
Termination of an open-ended guarantee
Article 2315 of the Civil Code expressly provides for the unilateral termination of an open-ended guarantee. The guarantor may terminate the guarantee at any time, subject to compliance with the contractual deadline or, failing that, a reasonable deadline.
This termination puts an end to the coverage obligation (for future debts), but the guarantor remains liable for debts incurred previously (settlement obligation), unless otherwise stipulated.
What happens to the guarantee in the event of the guarantor's death?
Article 2317 specifies that the guarantor's heirs are only liable for debts arising before the guarantor's death. The obligation to cover is therefore extinguished on the death of the guarantor, while the obligation to pay passes to the heirs. The text usefully specifies that any clause to the contrary is deemed unwritten.
The special case of current account guarantees
The ordinance creates an article 2319, which limits the liability of a current account guarantor in terms of time: "A guarantor of the balance of a current or deposit account may not be sued five years after the end of the guarantee".
This provision puts an end to a situation where a guarantor could remain indefinitely liable for the debit balance of an account, even after terminating his or her commitment. It provides welcome legal certainty for guarantors of business accounts.
A new legal framework to master
This wide-ranging reform of surety bonds brings clarity and balance to an area of law that has hitherto been characterised by a wide variety of texts and sometimes unstable case law. It strengthens the protection of individual guarantors while preserving the effectiveness of this guarantee, which is essential to business financing.
Understanding these new rules is essential for company directors, partners or relatives who are required to guarantee business debts, as well as for creditors. Applying them correctly will help avoid disputes and make credit transactions more secure.
Our firm can help you analyse your existing commitments or draft new surety deeds in line with this reform. Please do not hesitate to contact us for further information.personalised advice tailored to your situation.
Sources
- Civil Code, articles 2288 to 2320 (reformed by Order no. 2021-1192 of 15 September 2021)
- French Commercial Code, article L.110-1
- Order no. 2021-1192 of 15 September 2021 reforming the law on securities
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