Luxembourg Supreme Court extends banks’ duty to individual guarantors
The Luxembourg Supreme Court has ruled on a bank’s obligations when taking a personal guarantee (cautionnement) from an individual to secure a loan of a third-party debtor. The ruling follows the current trend for a clear reinforcement of the obligations of the banks when requesting a personal guarantee and is consistent with two recent amendments to article 2016 of the Luxembourg Civil Code relating to personal guarantees. The ruling is a further step towards imposing greater liability on banks in connection with obligations to inform and advise. (Luxembourg Supreme Court, 21 January 2016, n°3564)
Previously, although a bank had an obligation to ensure that a personal guarantor (caution) granted informed consent, Luxembourg courts tended to traditionally limit the scope of a bank’s obligation. A bank had no obligation to provide information and/or advice; it was a guarantor’s duty to be informed about a debtor’s financial situation, and generally to take care of his own affairs. This recent Supreme Court ruling increases the obligations of a bank towards an uninformed/non sophisticated individual guarantor.
A Luxembourg bank (Bank) granted two loans (Loans), respectively to a company and its subsidiary (Companies), totalling EUR 2.4 million. The Loans were secured by personal guarantees (Guarantees) granted by an individual, who was also a minority shareholder of the Companies1 (the Guarantor). The Companies went bankrupt. The Bank filed a claim before the Luxembourg District Court against the Guarantor in order to enforce the Guarantees.
The Guarantor challenged the enforcement of the Guarantees, arguing that the Bank should have inter alia informed the Guarantor about the state of the debts and difficulties of the Companies and ensured that the Guarantees were not manifestly disproportionate in light of the estate and revenues of the Guarantor. The Guarantor argued that the Bank was liable for gross negligence and/or wilful misconduct and, as a consequence, the Guarantees should be considered as null and void. The Luxembourg District Court rejected the Guarantor’s arguments and ordered the Guarantor to pay. The Luxembourg Court of Appeal upheld the Luxembourg District Court’s ruling.
The Luxembourg Supreme Court quashed the Court of Appeal’s decision. It held that the Court of Appeal should have asked whether the Guarantor was an informed/sophisticated guarantor (in this context, the Luxembourg Supreme Court seemed to consider that the fact that the guarantor was a shareholder of the debtor was not sufficient to assume that he was an informed/sophisticated guarantor). If he was not, then the court should have asked whether the Bank warned the Guarantor to consider his financial capacity and also the financial health of the Companies. The case was therefore remitted to the Court of Appeal (sitting with a new composition).
Comment
This ruling represents a shift in duties owed by a lender to a personal guarantor. According to traditional case law, a guarantor should act diligently and be informed of the sums owed by the debtor, its repayment ability, and its creditworthiness.2 However, in this ruling the Luxembourg Supreme Court extends a bank’s duties when dealing with an uninformed/unsophisticated individual.
This ruling is consistent with two recent amendments to article 2016 of the Luxembourg Civil Code relating to personal guarantees (cautionnement). As a reminder, Article 2016 (2) of the Luxembourg Civil Code now imposes on a creditor a duty to inform a personal guarantor: “When the personal guarantee is contracted by a natural person, the latter shall be informed by the creditor of the evolution of the amount of the debt secured and of its accessories at least once a year at the date agreed between the parties or, if there is no agreement, at the anniversary date of the contract, failing which all the accessories of the debt, costs, and penalties shall be forfeited”.3 4
Article 2016 (3) provides that: “A professional creditor cannot enforce a guarantee agreement concluded by a natural person, whose commitment at the time the contract was being concluded was manifestly disproportionate to his property and revenues, unless the guarantor’s assets, at the time the guarantee is being called, allow him to meet his obligation.5”
In contrast to the ruling, this new legislation does not distinguish between informed/sophisticated and uninformed/non-sophisticated guarantors.
To conclude, there is some uncertainty about the enforcement of a personal guarantee. Banks must be very diligent and careful when requesting a personal guarantee (cautionnement) from an individual, and will need to consider whether the person is informed/sophisticated. If not, a bank will need to decide whether the guarantee is too risky (ie a different form of security may be required) or whether to take steps (which should be documented) to ensure the individual understands the risk, extent of potential liability, and whether that liability is proportional to his/her own resources.
Footnotes
1. The Guarantor held 1% of the Companies’ shares.
2. “L’obligation d’information et de conseil du banquier”, Anne Morel & Elisabeth Omes, n°16-75, p.503 (Droit bancaire et financier au Luxembourg, Volume 2).
3. It is common practise in personal guarantee agreements that the guarantor waives its “benefit of discussion” right pursuant to which the guarantor may request the creditor to first enforce its right against the debtor and only then against the guarantor. By waiving the “benefit of discussion”, the guarantor may therefore be immediately called for contribution. This is why the legislator inserted an obligation to keep the guarantor informed about the evolution of the debt of the debtor (cf. Parliamentary document n°6021, p.50).
4. Free translation.
5. Free translation.
