When a shareholder-director grants a personal guarantee for the benefit of their company to secure one or more bank loans, they often do not suspect that this might hinder the eventual transfer of their business. Indeed, the buyer—who is already putting substantial effort into structuring the acquisition financing—will find themselves required to offer the bank collateral equivalent to the active guarantee.
What then is the scope of a guarantee agreement, and what are the essential points to know?
The guarantee agreement (acte de cautionnement)—not to be confused with the guarantor (caution), which refers to the person—already existed in Roman law. Article 2011 of the Civil Code states: "A person who acts as a guarantor for an obligation submits themselves to the creditor to fulfill that obligation if the debtor fails to fulfill it themselves."
It is therefore a unilateral commitment to pay on behalf of someone else, accessory to the primary contract linking the debtor and their creditor. A guarantee is a personal security, involving the entirety of the guarantor's assets, unlike real securities, which pertain to a specific asset (e.g., a mortgage or a pledge).
A guarantee can be simple or joint and several. In the latter case, the creditor can directly pursue the guarantor, or one of the guarantors, for the total amount of their commitment, without waiting for the primary debtor to become insolvent. Joint liability, just like the guarantee itself, is not presumed: it must be explicitly specified in writing. Naturally, bank guarantee agreements generally provide for joint, several, and indivisible liability precisely to allow for easier recovery in the event of default.
The legislature, however, sought to somewhat limit the sometimes dramatic consequences of these guarantees.
The law of June 3, 2007, introduced the concept of the gratuitous guarantee, meaning one that yields no direct or indirect benefit. When a guarantee is gratuitous, its duration is capped at 5 years, and the amount cannot exceed the principal debt plus interest, which is capped at 50% of the principal. Under penalty of nullity, the duration and amount must appear in a distinct guarantee agreement, and the famous statement "by acting as a guarantor, I commit to..." must be handwritten (Art. 2043quinquies of the Civil Code).
In the context of bankruptcy, the law of August 8, 1997, provides that the guarantor may be discharged if they prove, via a declaration to the court registry, that their commitment is disproportionate to their assets and income. It should also be noted that self-employed individuals can protect their primary residence by making a declaration of unseizability before a notary.
Finally, specific rules apply to guarantees provided in the context of consumer credit, which nevertheless also benefit from the aforementioned protection scheme for gratuitous guarantees.
During a business transfer, it is good practice for any guarantees that have been granted to be released; otherwise, the seller would de facto have to bear the consequences of the buyer's management errors.
This release is not a mere formality, but a formal decision by the bank's credit committee.
The seller would be well advised to address this release as early as possible to prevent the banker from having to be invited to the negotiation table. When the remaining balance due is small, or when certain real securities can be offered, this should not pose a problem.
Alternatively, the share purchase agreement (ideally even the letter of intent) must include a clause requiring the buyer to offer equivalent securities to the bank or, failing that, to fully repay the guaranteed loan.
Completing the sale of the business without releasing the guarantees is always possible, but certainly not recommended.
