In the present era, and particularly in the period following the economic recession and its recovery, many of our fellow citizens are struggling to cope with the repayment of bank agreements and loans. The major issue of loans in Swiss francs which is a blemish of the existing banking system as well as the predominantly inflexible regulations on the part of the Government, and the link with other common mortgages, has resulted in added problems being experienced by citizens against their counterpart credit institutions. The bank loans consist of a tripartite banking arrangement - the borrower/principal debtor, the ancillary (third party) debtor, and the guarantor of the principal debtor. This article will address the unfortunate position whereby a significant portion of citizens of the Republic of Cyprus have signed supplementary guarantee agreements, being in most cases relatives, friends, colleagues and/or in other relationships with the borrower, and have been called on to guarantee the repayment of and compliance with the loan agreement terms of the principal debtor party, as a means of securing the loan amount and avoiding the freezing of the borrower’s assets.
In Cyprus, during the booming period between 2006 and 2012, banking products and especially mortgages were easily and if I may say, ruthlessly granted and guarantor agreements for repaying loans were secured, without undertaking a full and accurate updating of the guarantor’s economic, legal and general financial circumstances. Moreover, the consequences of a cancelled agreement were not disclosed to the guarantor, which potentially presented him with the liability for the movable and/or immovable property with the financial institution. The banking institutions in granting countless loans did not scrutinize and/or check the solvency of the borrower, let alone the guarantor. In the thriving economic period banks were more focused on administrative matters than on the future repayment of loans and they were not overly concerned with whether the other parties (the guarantors) were solvent.
The main legislative framework governing the guarantee agreements consists of the Public Procurement Law, Cap. 149 of part XI, relating to coverage and warranty, as well as the latest legal admission of the Protection of a Specific Category of Guarantors Law of 2003 (197 (I)/2003) and the relevant amendments to both.
What constitutes a Guarantee Agreement on the basis of the above Laws? Guarantor contracts for the purpose of warranty and enforceability of the loan contract are concluded in writing and signed by the contracting parties. The bank guarantee constitutes the acceptance of a contractual obligation by a third party for the repayment of all or part of the loan amount, which was credited by the Bank to the principal debtor, by payment of the amount lent in the case of non-fulfilment of the contractual obligations as stated above i.e. the non-repayment of borrowings.
In practice, in contracts with bank guarantees, the guarantor undertakes to repay the loan of the principal debtor, combined and wholly, on the outstanding loan balance of the principal debtor in the possible event of the non-fulfilment of the principal debtor’s obligations.
A contract of guarantee is not only a protective measure of a financial institution which grants the loan but has often been used to benefit an errant debtor. It has been observed that the principal debtor feels secure with the existence of a guarantor and assures the bank of the recovery of the debt thereby enabling the guarantee relationship with the third party. At this point I wish to clarify that I am not referring to cases where there is a real weakness in the repayment of the loan, but in the "exploitation" by borrowers with the existence of a contract of guarantee.
The breakdown in the relationship through the non-repayment of the loan usually results in the banks approaching the courts to claim the outstanding loan amounts.
For the guarantors of these contracts, it is patently unfair to engage them in such conflicts, seeing as they do not benefit in any way from the amount granted to the principal debtor and instead are called on to sign a loan agreement which acts as a safeguard (safety net) for two separate parties to the contract and the compensation to which they have agreed. They do not in any way receive any benefit, often without having proper information from the bank and perhaps not even from the borrower, and, while acting in good faith, may not be aware of the negative consequences that may befall the estate, such as the eventual insolvency of the principal debtor.
On this point, the guarantors, through applicable legislation, can have access to some protective measures to overcome the unfavorable position in which they are usually put and to defend themselves in such a way as to be released from this burden.
In summary, I would just like to mention some measures to protect guarantors:
- Action against the principal debtor, leading to the eventual forced repayment of any amount to the satisfaction of the financial institution.
- Examination of the validity of the guarantee contract as to the guarantor’s full knowledge of the terms, the formal conclusion of the contract, and any modification and change during the course of the repayment of the loan and to any term and/or subsequent agreement of the loan contract.
- In the case of the implementation of a judicial decision an appeal may be exercised to suspend the execution of the contract, as a means of avoiding alienation on the part of the principal debtor, the transfer and/or otherwise the disposal of any property which may be provided for the satisfaction of the debt.
Although ways exist in dealing with the protection of the guarantors and their obligations, the key problems facing the guarantors stem from the absolute inability of principal debtors to meet their contractual obligations where, while the guarantor assumes and fulfills the contract of the principal debtor, the guarantor remains vulnerable and his estate mortgaged, without any recourse against the principal debtor for the recovery of his financial loss. Moreover, this judgment is issued against a written MEMO on the entire property of both the principal debtor and the guarantor and can only be removed with extreme difficulty.
Guarantors of bank contracts are among the most vulnerable parties of personal legal transactions. The guarantors have rights and are able to take measures either judicially or extra-judicially for the defence and protection of their legal rights. The Government, however, will need to establish legal frameworks which will go towards improving the existing system of guarantee and in particular the protection of the assets of the guarantors.
The content of this article intends to provide a general guide to the subject matter. Specialist advice should be sought on each particular case. For any further information, please contact Mr Savvas Savvides.