Rights of a Guarantor who has paid the Debt against the Primary Debtor

Legal Insight

January 2022

Archontoula Tsogia, LL.M

Summary: Often in commercial practice, the lender, in order to provide the requested financing, requires a third party to provide a guarantee in his favour, i.e. to undertake towards the lender the obligation to fulfil the provision of the same (the principal debtor) in case the latter fails to do so; l. e.g. in order for a bank (the lender) to grant a loan to a person (the borrower - the debtor), it usually requires a third party (the guarantor) to provide a guarantee for the borrower in order to ensure that the borrower will repay the loan received. The guarantor, in the event that he is called upon and actually fulfils the obligation of the primary debtor towards his creditor, is entitled, under certain conditions, to take recourse (recourse right) against the primary debtor and is substituted by law for the rights of the creditor to the extent that he has satisfied the latter (Art. 858 CC). 

1. Introduction:

A guarantee is a tripartite relationship between the creditor, the primary debtor and the guarantor. The object of the guarantee is the obligation undertaken by the guarantor to fulfil, through his own property, the primary debtor's obligation to the creditor in the event of the latter's default. We note, therefore, the existence and operation of three separate legal relationships between the above persons: (a) the contract between the creditor and the primary debtor; (b) the guarantee contract, which is agreed exclusively between the guarantor and the creditor (it is not even necessary for the debtor to be aware of the existence of a guarantee contract); and (c) the internal legal relationship between the guarantor and the primary debtor, which operates independently of both the guarantee contract and the contract concluded between the guarantor and the creditor. In many cases, given the insolvency of the principal debtor, the third party in the relationship, the guarantor, is called upon to pay the creditor part or all of the debt. The following is a brief but clear description of the conditions under which the right of the guarantor who has actually repaid the debt to take action against the debtor in order to obtain from the latter what he has paid, and the way in which this right is exercised by means of examples from the case-law. 

2. Conditions for substitution of the guarantor for the rights of the creditor:

a) The guarantor must have previously satisfied the creditor: The satisfaction must be definitive and real (it is not sufficient to simply discharge the guarantor by debt forgiveness), may be partial or total, and may be effected by payment or other substitute means (set-off against the guarantor's counterclaim, public deposit in the Deposit and Loan Fund, etc.). etc.), as well as upon acceleration of enforcement by the lender (e.g. the guarantor paying voluntarily or upon seizure/auction of his assets by the lending bank all or part of the instalments due by the borrower to the latter). Note that in the case of partial satisfaction, the guarantor is subrogated to the rights of the lender to the extent and to the extent that he has satisfied the latter. 

b) The guarantor has a right of recourse against the primary debtor: The guarantor, after having satisfied the creditor, as described above (see paragraph 2(a)), in order to subrogate the latter against the primary debtor, this must be justified by the internal legal relationship between the guarantor and the primary debtor. That is to say, whether the guarantor will have the right to take action against the primary debtor and to seek from the latter what he has paid to the creditor depends on the internal legal relationship between the primary debtor and the guarantor, the nature of which will be determined in each case according to the facts of the case. Only where the relationship between the latter can justify the satisfaction of the creditor by the guarantor will the guarantor have a right of recourse against the primary debtor (e.g. where the guarantor has given the guarantee to the debtor under a mandate given to him by the latter or under a contract of work between them). On the other hand, the guarantor will not have a right of recourse and will therefore not be entitled to take action against the primary debtor in cases where the legal relationship between the guarantor and the primary debtor is of such a nature that it cannot justify its existence (e.g. where the guarantor has given the guarantee to the debtor as a gift, in the context of a donation). The guarantor must invoke and prove the existence of the right of recourse, as stated above (AS 1614/19999, Elldni 2000, 382). If the primary debtor disputes the existence of a right of recourse, the guarantor is entitled to bring a declaratory action against the primary debtor, requesting recognition of the existence of a right of recourse, provided that the creditor has paid the debtor (AS 1065/1990 OJ 1991, 424). This action must clearly and fully set out the guarantor's right of recourse, otherwise it will be vague, which cannot be remedied by means of proposals or reference to documents (AS 784/75 ArchN 26.235).

3. Cases of the most basic internal relations, which may or may not justify the creation of a right of recourse of the guarantor against the principal debtor.

Α. Cases in which a right of recourse is justified:

i) Mandate Contract: A contract of mandate (Art. 713 et seq. CC) is a contract between two persons (in this case the principal debtor - guarantor), of a personal and confidential nature, whereby the principal (principal debtor) entrusts the principal (guarantor), without remuneration, with the conduct of a case. The contract of mandate may also be drawn up informally between the parties, expressly or implicitly, but it must always be clearly stated. The contract of mandate essentially gives the principal the right to claim from the principal the reimbursement of the expenses incurred by him in the normal performance of the mandate (713 and 722 CC). The following are examples of case law decisions in which the existence of a right of recourse for the guarantor has been recognised where the internal relationship between the principal and the guarantor was that of a mandate:

• Members of the Board of Directors ("Board of Directors") of a Public Limited Company ("P.S.C.") were contracted as guarantors in a bank loan agreement of P.C., in execution of a mandate contract of P.C. Due to non-compliance with the terms of the contract, the bank denounced the loan and issued a payment order which it notified to the primary debtor and the guarantors, ordering them to pay an amount of EUR 90,899.57. One of the guarantors, knowing that the company's assets were no longer sufficient to repay the debt, having filed an opposition, but fearing the imminent seizure of his own property (as the enforcement proceedings had not been suspended under the then applicable Art. 938 CCC) and in order to prevent it, he paid the total amount due and then took legal action against the company and the co-guarantors. The court upheld his action (Lamia Single-Member Court of First Instance 16/2021).

•  A loan was concluded between an individual (debtor) and a bank (lender), under which a third party (guarantor) provided a guarantee under a mandate agreement between the debtor and the guarantor. The debtor persuaded the guarantor to provide the guarantee by falsely representing to him that his personal assets were sufficient to cover the loan, when in fact he had no assets. Consequently, in order to prevent the bank from enforcing the execution of his property, the guarantor was forced to pay the amount of the loan of EUR 18 529,98 which was due and payable, to the detriment of himself. The court of first instance accepted the guarantor's claim by ordering the payment of the above amount to the guarantor - plaintiff by virtue of the substitution of the guarantor in the bank's rights (MonProtPatr 473/2015), and the court of second instance upheld the above judgment (Patras Single-Member Court of Appeal 307/2020).

ii) Νegotiorum gestio: negotiorum gestio (Art.730-740 CC) is a factual situation between the administrator (guarantor) and the principal (debtor), which is recognised as existing by law by the mere fact that the administrator handles and administers a foreign case without having any right or obligation to do so. In this respect, if the guarantor, as a foreign administrator, undertakes the (handling) of the foreign case in the interest of and in accordance with the actual or presumed will of a principal (primary debtor), he is entitled to claim from him the costs of the administration and the compensation of the losses (Art. 713 et seq, 730and 736 CC). However, if these conditions are not met, namely (a) the conduct of a case, (b) the nature of the case as 'foreign' and (c) it is not a contract of mandate, the administrator will only be entitled to claim reimbursement of the costs incurred, in accordance with the provisions on unjust enrichment (Art. It should be noted that the character of the case as 'foreign' is determined according to the facts of the case (e.g. in cases of closed-type capital companies (often of a family nature), where the shares/shares are owned by a limited number of persons, who usually also exercise administrative - management functions (substantial owners) and personally guarantee the debts of the legal person, despite the fact that they are independent legal persons, however, the act of the guarantor - shareholder - manager to guarantee the company may not be a foreign case, but a case of its own). The following is an example from case law, in which the existence of a right of recourse for the guarantor was recognised in a case where the internal relationship between the primary debtor and the guarantor was that of a fair administration of a third party:

• S.A. receiving and transmitting stock exchange orders entered into a cooperation agreement with another S.A. with which it undertook the obligation to transmit to the latter, against a commission paid by the above-mentioned stock exchange company, third party orders for the purchase and sale of shares through the Athens Stock Exchange. By a special clause in that contract, it guaranteed as a debtor in its own right the debts of third parties to the company arising from the execution of the orders in question, which were to be transmitted to the company through the former. An investor, who had concluded an investment services contract with the first aforementioned company, authorised it to transmit his orders as described above. From shares purchased by the company in the name and on behalf of the investor, the latter owed the first company the sum of GRD 7 303 257, which, because of his refusal, the brokerage company was obliged to pay in order to avoid a claim against it on the basis of the guarantee it had given. The guarantor, having paid the debt, brought an action against the debtor. The court acknowledged that the guarantor had a right of action against the principal debtor because of a legal relationship existing between them in the form of a non-genuine or illegitimate administration of an alien (she knowingly managed a foreign case as her own in her own interest in order to obtain a commission from the lender) (CC 668/2007). 

Β. Cases where the creation of a right of recourse is not justified: 

i) Payment out of liberality - by gift (e.g. gift): as mentioned above, no right of recourse exists if it cannot be justified by the internal relationship (primary debtor - guarantor). This is particularly the case when the legal relationship between guarantor and primary debtor is a gift, such as when the reason for the assumption of the guarantee was a gift from the guarantor to the primary debtor. In the following, relevant court decisions are cited, which lead to the assumption that there is no right of recourse for the guarantor (and therefore no substitution of the guarantor for the rights of the creditor) in cases where the internal relationship between the primary debtor and the guarantor was a gift:

•   A family limited partnership that was converted into a limited liability company, which retained its family character. The original partners had guaranteed their company's loan agreements. They sold their personal property to repay, due to the company's dire financial situation at the time. They sold 51 % of the shares owned by one of the partners, mentioning in the transfer agreement all the company's liabilities, but not the above payments made by the guarantors. This was followed by the death of one of the partners. Her will did not mention any of her claims from the above payment she had made. Her heir took recourse against the principal debtor. It was held that the above payments made by the guarantors in payment of the debts of the firm were made out of liberality. The action against the company for reimbursement of the sums paid was dismissed, as it was held that there was no case of contract of mandate, administration of alienation or unjust enrichment. In particular, the judgment concludes by stating the following: 'The foregoing does not, however, prove a contract of mandate or the management of a foreign case, but rather the contrary, self-initiated and voluntary actions of [...] and [...], subsequently approved by the defendant company, which took place because of the identification of their property with that of the defendant, which was their family business, through which they ultimately made a living and with which they had a complete identity of interests. In other words, the case did not ultimately fall within the property and personal sphere of another person, i.e. the defendant company, nor did it primarily relate to the circle of interests of that legal person, but to the circle of interests of [...] and [...], who, as was also shown by the individual elements referred to above, were not aware that they were running a foreign business. On the contrary, the assertion of claims based on a contract of mandate or management by a third party is an ex post facto finding, especially after the loss of control of the company by the original main shareholder, which led to disputes between the new partners. In the absence of a right of recourse, it is not necessary to examine whether [...] and [...] had in any event waived that right, as the defendant claims. [... ] by virtue of a promissory contract of donation or, in general, by virtue of a unilateral gift made out of free will with the intention of legal commitment, constitute legal grounds for the retention of enrichment based on the will of the donor, and therefore the free and legally strong will to provide a guarantee leads to their self-commitment and the aforementioned could not in any event claim the return of the benefit, which they have added, disregarding their previous voluntary act, as well as the faith shown in it by the enriching defendant company" (Multimember Court of First Instance of Ioannina 116/2010).

4. Effects - Consequences of the substitution of the guarantor on the rights of the creditor

If the above conditions are fulfilled, then, as soon as the guarantor has satisfied the creditor, he is subrogated by law to the rights of the latter (to the extent that he has satisfied him) and is entitled to take action against the original debtor in order to obtain what he has paid. In particular, the creditor's claim against the first debtor for payment of the latter's debt is legally subrogated to the guarantor to the extent and in the state he was in at the time of satisfaction. In addition, the guarantor (Art. 458 CC) acquires all the creditor's rights ancillary to the claim to secure the principal debt (e.g. the creditor's lien or mortgage on the property of the original debtor or a third party, other guarantees, etc.), as well as any privileges the creditor may have in enforcement proceedings. With regard to other types of security which the creditor may have obtained to secure his claim against the first debtor (e.g. retention of title to the debtor's or a third party's property), although they are not automatically transferred by law to the guarantor, the creditor is nevertheless obliged to take the necessary steps to transfer them. Finally, the guarantor also acts in place of the creditor in cases where the latter has taken legal action against the debtor. 

5. Recourse against the guarantors

If there are several guarantors in connection with the same debt, if one of them satisfies the creditor (pays all or part of the debt to the creditor) and has a right of recourse (see paragraph 2 above), he may take action against the other co-guarantors to the extent and for the amount that he has a right of recourse against them (Art. 860 CC). Most of the guarantors (joint guarantors) are jointly and severally liable to the creditor, even if they did not jointly assume the guarantee (Art. 854, 860 and 487 CC). Unless the internal relationship between the joint guarantors indicates otherwise, they are all equally liable ((Article 487(1) CC). Therefore, the subrogation of the guarantor who has paid the creditor's rights against the other guarantors will be limited only to the amount of the principal debt remaining after deduction of the part of the debt for which he is responsible as guarantor. The remainder, therefore, is divided in equal parts among the other co-guarantors (if nothing else follows from their internal relationship) and the paying co-guarantor will be able to claim it from the other co-guarantors (See, for example, Piraeus Court of First Instance 1756/2017).

6. Loss of the guarantor's right of recourse

A guarantor who, in accordance with all of the above, has repaid part or all of the debt and has a right of recourse against the primary debtor (or the other co-guarantors) may lose this right and may not be able to take recourse against the latter persons to claim what he has paid. This would be the case if, before paying part or all of the debt to the creditor, he failed to raise valid objections which the original debtor had (Art. 853 CC), which he knew or ought to have known (Art. 859 CC) and which were decisive for the fate of the principal debt. The guarantor must have been negligent in failing to raise these objections, which is a matter of fact, but otherwise he is not deprived of his right of recourse (e.g. in the event that the creditor takes action against the guarantor and demands payment of the debt, the guarantor may have to act with due diligence and inform the primary debtor so that he himself can receive information on any objections raised by the latter and present them to the creditor in good time). It should be noted that the primary debtor will have to prove that the above conditions are met and therefore the guarantor has forfeited its right of recourse, and the guarantor may object that it was not aware of the existence of the specific objections. However, even if the guarantor is deprived of his right of recourse because he negligently failed to raise the primary debtor's objections in time, he may still have a claim for unjust enrichment against the primary debtor (or the co-guarantors) or the creditor (Art. 904 CC).

7. Instead of an epilogue

In case the guarantor actually pays to the creditor part or all of the primary debtor's debt and a subrogation case arises, according to the above, the former acquires (after transfer) directly by operation of law the creditor's claim against the primary debtor (or the co-guarantors) and is therefore entitled to claim from the latter and receive what he has paid. At the same time, the guarantor's claim against the primary debtor continues to exist by virtue of the internal relationship between them at any given time (e.g. a mandate) and is the reason why the guarantor has guaranteed the primary debtor against the creditor. The two claims exist in parallel and it is up to the guarantor's discretion as to which of the two he will seek to satisfy his right (305 et seq. CC) in order to obtain from the primary debtor what he has paid to the creditor.