Private or commercial suretyship?

A lender will almost always require security when providing loans. This not only includes collateral security, such as pledges and mortgage rights, but also personal security. A common personal security is suretyship. Continue reading to find out more about personal or commercial suretyship.

Surety

Under the suretyship, a third party, such as a director or family member, undertakes to fulfil the borrower’s payment obligation to the lender. If the borrower defaults on its payment obligation, the lender can hold this third party (the surety) responsible for payment of the debt.

Private suretyship versus commercial suretyship

There are two types of suretyship: personal suretyship and commercial suretyship.

A personal suretyship is a suretyship entered into by a natural person who:

• is not acting in the course of his profession or business; and
• is also not acting in the normal exercise of a private limited company or public limited company of which he is a director and of which he holds the majority of shares alone or with his co-directors.

All other cases involve commercial suretyship.

This does not mean that every director of a private limited company or public limited company who enters into a suretyship in his capacity as director can be considered a commercial surety. This is because the first thing that needs to be ascertained is whether the suretyship was entered into ‘in the normal exercise’ of business. If this is not the case, then it is a personal suretyship.

This involves assessing whether the legal act for which the suretyship was entered into is within the normal exercise of the company’s activities. For example, this is more likely to occur in the case of a financial holding company taking out a loan, than in the case of a baker or hairdresser taking out a loan.

To assess whether a personal or commercial suretyship exists, one must weigh all the circumstances. There is a lot of case law on this topic.

The differences are very important!

Personal suretyship is highly protected by law. A personal suretyship must therefore meet strict requirements. If a personal suretyship does not meet these requirements, then the suretyship may be void or voidable.

Unlike a commercial suretyship, a personal suretyship can only be proved by a written document signed by the surety.

The amount of security he is providing should also be clear to the surety. If the amount of the borrower’s commitment is not yet fixed at the time of entering into the suretyship, then the suretyship is valid only insofar as the maximum amount for which he provides security has been agreed.

Furthermore, the consent of the spouse of the surety is required to enter into a personal suretyship. If the spouse did not give this consent, then the spouse can seek annulment of the contract of suretyship. The lender can then no longer call upon the suretyship.

Finally, professional lenders such as banks have a special duty of care towards a personal surety. A professional lender is required to provide the surety with information about the risks involved in entering into the suretyship.

Therefore, to make sure that you can rely on the suretyship in a particular case, it is important to assess whether the suretyship is commercial or personal. You can then ensure that the contract of suretyship complies with the legal provisions.

In conclusion

As a lender, do you want to be sure that the contract of suretyship you have negotiated provides security? Did you stand surety and are you being called to pay? Or do you have other questions about contracts of suretyship? Please do not hesitate to contact me or one of the other specialists at GMW advocaten. Together we can discuss your options.