Factors to be considered when pursuing rights under guarantees
In practice, guarantees (Bürgschaften) are mainly used to secure loans, as well as consumer credit, and overdraft facilities and operating loans for businesses. In order to ensure that they can enforce their rights under guarantees, banks must keep an eye on two different limitation periods. The motto: “A creditor should never make do with just pursuing its rights against a guarantor”, definitely applies.
1 . What does this mean?
Enforcement of rights under a guarantee is subject to the general limitation period of three years. According to the latest decisions of the Bundesgerichtshof (the Federal Court of Justice, Germany’s highest appellate court), the limitation period starts to run from the point in time when the principal debt becomes due, and not first when demand is made against the guarantor.
As the guarantee is accessory (i.e. subsidiary to the underlying principal debt), the guarantor can object to enforcement of the guarantee on the basis that the claim for the principal debt is statute-barred. In accordance with the relevant legislation (since 1 January 2002), the general limitation period for repayment of a loan is three years from the date it falls due (the exception is consumer credit contracts, which have a limitation period of 1 0 years). This results in limitation periods running in parallel for both enforcement of the guarantee and the underlying principal debt. This can have disastrous consequences.
2. What can you do?
2. What can you do? The timely enforcement of rights under a guarantee cannot neglect the principal debt, even if the principal debtor has no assets and it is clear that there is no possibility of recovery against him. Proceedings against a guarantor will not be considered to be instituted in time, if the claim for repayment of the principal loan against the borrower is already statute-barred, or becomes statute-barred during the litigation against the guarantor. Even if judgment has been issued against the guarantor, he will be able to validly object to payment in the event that enforcement of the principal loan becomes statute-barred prior to payment. He can overcome a final judgment with a claim to oppose enforcement ( Vol/streckungsgegenklage), and can also demand the re-payment of monies paid out by him. Effective measures must therefore be undertaken against the principal debtor to stop the limitation period running. It may seem like a case of ‘throwing good money after bad’, but this should be done even if it appears likely that the principal debtor is insolvent or will be struck-off from the Commercial Register (if a company). Even the following circumstances will not prohibit the guarantor from being able to raise the defence that recovery of the principal debt is timebarred:
- The principal debtor does not raise the expiry of the limitation period in court proceedings against him;
- The principal debtor is the subject of a default judgment or judgment based on his own acknowledgment of liability, in proceedings commenced after the expiry of the limitation period;
- An agreement has been reached between the creditor and the principal debtor to the effect that the debtor will not invoke the defence that the claim is statutebarred.
- The principal debtor has provided the creditor with a notarial acknowledgement of the debt, or an acknowledgement within the scope of a settlement with the consequence of a longer or new limitation period, respectively.
3. How can we help you?
We have long-term experience in representing banks, which are pursuing their rights under guarantees. In this context, we also advise on steps and measures that can be taken to effectively stop or extend the general limitation period for recovery of the principal debt. There are procedural possibilities as well as contractual possibilities, e.g. individual, written agreements with guarantors dealing with the waiver of the defence of the principal debt being statute-barred. Consideration should also be given to additional ways to guard against limitation period problems, including making the claim on the guarantee due first when the bank makes formal demand on the guarantor, or extending the relevant limitation period to five years.