Validity of guarantee instruments and impact of insolvency proceedings on guarantees

In a judgment dated 25 September 2018, the Court of First Instance of Monaco clarified the manner in which the judges assess the validity of a guarantee instrument.

In the case in point, the guarantors of a company - which was the client of a bank – contested the authenticity of the initials written on the pages of the guarantee instrument, arguing that these were not written by their hand, and that the provisions of the instrument should therefore be declared unenforceable.

The Court began by pointing out the purpose of the initials, taking the view that initials written on the pages of a contract preceding the page on which the signature appears, are merely a means of avoiding any disputes regarding the content of the parties’ commitments.

Having noted that the guarantors in no way disputed the content of their commitment, the Court also noted that the handwritten words required by law did appear on the final page of the instrument, along with the guarantors’ signatures, and that the authenticity of these elements was not called into question by the guarantors.

The joint and several guarantee should therefore produce its full effects, to the benefit of the bank. 

This particular judgment also provided some clarification concerning the impact of insolvency proceedings on guarantees.

When insolvency proceedings are opened, all existing debts owed by the principal debtor become due and payable, and any individual proceedings against the debtor by creditors are suspended.

The suspension of individual proceedings applies only to the principal debtor, however, and creditors – in this case the bank – can legally seek payment from the guarantor.

On the other hand, interest on amounts due ceases to accrue, not only for the principal debtor but also for the guarantor. This is partly on account of the principle whereby the amount guaranteed by the guarantor may not exceed that owed by the principal debtor, and partly because the suspension of interest accrual is an inherent exception to debt under Monegasque positive law, which the guarantor may therefore validly raise against the creditor.