Just the other morning a friend of mine called me sssscccrreeeaammmiinnggg; she said a certain Nigerian bank had deducted N7m from her account. It was a Saturday morning, so there was no way to contact the bank to ask them for the exact details of the transaction. She said her account manager’s number was not going through and that when she checked online she could not see specific details for the deduction…just a series of transaction codes.
After calming her down, I asked her to be patient and wait till Monday to get clarifications. There was actually nothing that could be done before then, so she had no choice but to relax and sleep. (I can just visualise her in church the following morning…hehe)
When she called the bank on Monday, she was given the biggest reality check of her entire life. Apparently 2 years prior this time, her ex-fiancé had wanted to expand his business and needed a loan from the bank. He didn’t have any assets to secure the loan, and had asked her to stand as his guarantor. She has a flourishing interior design business, and also receives a considerable amount as rental income from property she inherited from her grandfather. Her boo was her world and they were about to be married and start a life together. She was doing well, so accepted to be his guarantor. In all honestly I think she desperately wanted to personify the perfect “wifey” and so couldn’t say no.
He kept on stressing that it was just a hypothetical situation and that the chances of him defaulting were slim. She told herself she knew him inside out and would be able to police his obligations under the loan agreement. The way she saw it “at least he wasn’t being a waste man with no ambition. He had big dreams of growing his business and was not asking her to ‘lend’ him money”.
As you can imagine, when the relationship scattered because his ex-girlfriend had just given birth to his first child, “policing his loan obligations” were not at the forefront of her mind. In all honesty, she had completely and utterly forgotten about that random document she signed over 2 years ago.
The question now was…how does she get her money back?
Let’s start with the Guarantee Agreement
A Guarantee Agreement is defined as a written undertaking made by one party (the “Guarantor”) to a second party (usually the “Creditor”), consenting to be responsible if a third party (usually the “Principal Debtor”) fails to perform a certain duty, i.e. payment of a debt.
Halsbury’s Laws of England defines a Guarantee Agreement to mean an accessory contract by which the Guarantor undertakes to be answerable to the Creditor for the debt, default or miscarriage of a Principal Debtor; the primary liability to the third party must exist or be contemplated before the creation of the Guarantee Agreement.
I must stress that in considering the adequacy of a Guarantee Agreement, what is of importance is the financial position of the Guarantor and not the financial inadequacy of the Principal Debtor.
This is the person to whom obligations of the Principal Debtor and the Guarantor are owed. In the event that the Principal Debtor defaults on his/her obligation to pay the principal loan, then the Creditor may recover the amount outstanding from the Guarantor.
The Principal Debtor
This is the person primarily liable to the Creditor for the obligation guaranteed. The Principal Debtor is not a party to the Guarantor’s contract with the Creditor, even though the Guarantor’s contract stems from the dealings of the Principal Debtor. Thus we often see instances where the Creditor has deemed the Principal Debtor as incapable of settling the debt and thus focuses all efforts on retrieving the outstanding monies owed, plus interest, from the Guarantor (i.e. they no longer bother with the Principal Debtor and “hound” only the Guarantor).
The Liability of the Guarantor
The Guarantor’s liability is a secondary obligation that is only triggered upon default by the Principal Debtor. A Guarantor cannot be held liable for more than he/she has undertaken to guarantee; in addition, the liability of a Guarantor cannot exceed that which is owed by the Principal Debtor.
The Guarantor’s Rights on Demand for Payment
The manner in which the Creditor is able to make a demand against the Guarantee Agreement is usually dependant on the terms of that agreement as well as the terms of the agreement between the Principal Debtor and the Creditor. Generally, the Creditor is only required to issue a demand notice to the Guarantor upon a default by the Principal Debtor, the Creditor may thereafter commence legal action for recovery if the Guarantor does not comply with the terms of the demand notice.
Unless the Guarantee Agreement itself provides otherwise, generally:
• There must be a clear case of default on the part of the Principal Debtor before the Creditor can pursue the Guarantor;
• All remedy periods relating to the event of default should have expired with the default in question not having been remedied;
• The Creditor must not have impliedly or expressly waived the default in question.
However, I must stress that the terms of individual Guarantee Agreements are governed on a case by case basis; we are now seeing instances where as a prerequisite, Creditors are demanding that the Guarantor issues blank cheques, said cheques to be presented by the Creditor at the point of default by the Principal Debtor, without the obligation requiring the Creditor to give the Guarantor prior notice.
The Guarantor’s Rights After the Settlement of Debt
A Guarantor has a right to the recovery of money improperly paid to a Creditor, this would entail money which could have been paid under a mistake of fact as to the Principal Debtor’s obligations.
The Guarantor may also be indemnified by the Principal Debtor for the total amount paid in settlement of the debt, plus interest. However, in reality a Principal Debtor who was unable to repay its Creditor is unlikely to be able to repay the Guarantor.
Determination of a Guarantee
I must stress that unless the agreement to which the Guarantee was given had been terminated in accordance with the terms of that agreement, whilst the Creditor is being owed an obligation by the Principal Debtor, the Guarantors obligation to the Creditor will continue to subsist.
Furthermore, unless the Guarantee Agreement provides to the contrary, the Guarantee will be determined if the Principal Debtors obligation is changed without the Guarantor’s consent.
My friend was able to confirm that the reason why the bank was able to simply deduct the money from her account was because she had issued an undated cheque at the time of signing her Guarantee Agreement. It was simply filled in and presented as final settlement for the debt.
Luckily for my friend, under the terms of her agreement, the bank was supposed to give her several demand notices at the point of default to enable her mitigate the situation with hopes of getting the Principal Debtor to pay the debt being owed to the Creditor.
The bank had failed to do this, thus were forced (after stern warnings from my friend’s lawyer, who happens to be a no-nonsense highly rated Senior Advocate of Nigeria and who also happens to be my friend’s father) to reverse the transaction and follow due process.
The concept of guarantor is something which is now a part and parcel of modern day banking, yet what intrigues me is the fact that many people do not seem to appreciate the full implication of standing as someone’s guarantor. Maybe this stems from the fact that it is to a large extent a worst case scenario.