Bonding is a common practice to ensure the risk of unpaid. But it involves a number of commitments. Zoom on its characteristics and its operation.
Qualification of the bail bond
The bond is, in principle, by nature a civil act. Nevertheless, it is recognized that, as an exception, the bond may be of a commercial nature. If you want to learn about bail bonds then start with the Lionsbailbonds.com site.
The commercial nature of the bond implies the jurisdiction of the commercial court in case of litigation. On the other hand, the limitation periods (five years) are identical, whether the action is civil or commercial.
The bond can be qualified as commercial when:
- it is purchased for a fee by a credit institution. In this case, the establishment is a surety for its client, the latter paying him for this service;
- the guarantor agrees to honor in the event of default of the principal debtor of the commercial paper;
- the suretyship is subscribed for the purposes of commercial activity, for example when a supplier guarantees a distributor to a bank to facilitate the granting of a loan;
- the guarantor has a personal interest in the property and the bonded operation is commercial. This is, for example, the case of the manager of the company who stands surety when obtaining credit for the benefit of his company. The case law of the Court of Cassation specified that this qualification was required even when the manager of the company was not a trader. On the other hand, the bonds of the partners, even the majority, and those of the manager’s spouse are not considered commercial.
The civil or commercial nature of the bond entails the application of separate rules that may have significant implications on the assets of the guarantor.
The bond being an important act for a natural person, the legislator conditions its validity to rules of strict forms. Thus, the Civil Code provides that the surety must expressly agree. Unable to be presumed, the guarantee usually gives rise to the establishment of writing. This writing is mandatory, in all cases where the law requires that the surety bears certain mentions in the act declaring his engagement.
On the other hand, in order to facilitate the business life, the requirement of writing subject to rules of strict forms does not apply to the commercial bond. However, for the purpose of protecting the manager who is most of the time required to impose a bond of his company by a credit agency, jurisprudence has tempered this reasoning. Thus, the commercial rules of evidence apply only when the surety is a merchant. The proof can be done by any means only when the act is of a commercial nature and the guarantor is a merchant (a person who carries out acts of commerce and makes it his usual profession).
An incomplete or poorly written surety bond is only a beginning of written evidence that must be supplemented by external elements. The case law thus considers that the quality of corporate officer constitutes an external element proving the act of guarantee. Indeed, because of his position in society, the leader is necessarily aware of the act, and the extent of his commitment.
The commercial bond, therefore, requires a written act that must comply with the same requirements as the civil bond, except when it is subscribed by a merchant in the performance of his duties.
The commercial nature of the bond automatically leads to solidarity. This applies automatically in commercial matters, whereas it must be expressly stipulated in the framework of the civil bond.
Here again, the legislator intervened, in order to limit the consequences, for a company executive, related to the conclusion of a commercial bonding contract. Thus, the Consumer Code provides that in a suretyship contract granted by a natural person for the benefit of a professional creditor, the clauses of solidarity and waiver of the benefit of discussion are deemed to be unwritten if the undertaking of the guarantor is not limited to an overall amount, expressly and contractually determined. This amount must include interest, fees, and incidentals. A bond for an unlimited amount cannot be solitary.
For the purpose of protecting the interests of the guarantor, the judge may also classify the bond deed as joint, that is to say, commercial and civil, depending on the quality of the parties. In this case, the judge applies the specific rules to each bond.
Essential characteristics of the deposit
There is a simple guarantee of joint security.
The simple bond
The simple bond is a guarantee of payment where the bond is not secured to the principal debtor or other sureties. Indeed, in the absence of the express mention “joint guarantee” on the deed of guarantee, the deposit is committed according to the rules of the simple guarantee.
This lack of solidarity has two consequences:
- The creditor can only seek payment from the guarantor after exhausting all possible legal remedies ( benefit of discussion ). Thus, a simple bond can only be committed after the implementation and failure of a movable or real estate seizure, for example.
- The surety may oppose the creditor the benefit of division: in case of a plurality of sureties, the creditor is obliged to pursue each surety for his part.
The Civil Code provides that it is up to the guarantor to oppose these arguments to the creditor who has not respected them.
The commitment of the single surety is therefore quite limited. This is why, in practice, the financial partners of the company favor the use of joint surety bonds.
Bonding in solidarity requires writing, except in the case of a commercial bond subscribed by a merchant.
This requirement of the legislator is explained by the importance of the commitment of the surety in this contract. Indeed, the situation is very protective for the creditor who can apply to the surety as soon as the principal debtor is defective, without waiting for the expiry of judicial proceedings. The guarantor loses the benefit of discussion which is granted to him as simple security. It is bound to pay the debt under the same conditions as the principal debtor.
In addition, when several people are joint guarantors, they guarantee together with the creditor and each of them is committed to the whole. The creditor is free to choose the debtor he wishes, his choice stopping, logically, on the most solvent.
By its payment, the surety is automatically subrogated in the rights, actions, and privileges of the creditor, that is to say, that it benefits from the rights enjoyed by the lender with respect to the borrower. In addition, solidarity has the effect of making a judgment of the court against the principal debtor against the surety.
How the bond works
When a natural person is a surety by deed under private signature (that is to say, an act which is not passed to a notary), specific handwritten mention must appear in the deed of guarantee, so as to make the surety aware of the extent of his commitment. This mention is the following and only this one:
“By depositing X with the sum of … covering the payment of principal, interest and, if applicable, penalties or interest for late payment and for the duration of …, I undertake to reimburse the lender the sums due on my income and my property if X does not satisfy it himself “.
In the case of a joint and several guarantees, the following sentence must be added, on pain of nullity of the commitment of the joint surety:
“By renouncing the benefit of discussion defined in Article 2298 of the Civil Code and by binding me jointly with X, I undertake to repay the creditor without being able to demand that he pursue X”
If the guarantor has not fully written his pledge in his hand, the pledge is void and the bank can not play the bond.
Attention: the professional creditor must inform the guarantor before March 31st of each year of the amount of the principal, the interest, commissions, and costs remaining to run on December 31 of the previous year in respect of the secured obligation as well as the term of this commitment.
In addition, if the appointment is for an indefinite period, the creditor must remind the surety of his right to revoke his appointment at any time. If the guarantor revokes his appointment, he remains nevertheless liable for the debts due at the time of the revocation. Failure to comply with this obligation entails, for the creditor, the forfeiture of interest accrued from the previous information until the date of communication of the new information.
The creditor is obliged to inform the guarantor within one month, from the payment incident, of the default of the debtor. The case law specifies that this obligation also applies to the senior officer of his company.
Protection of the guarantor of his company
If the manager subscribes to a surety bond of his company, he becomes liable for the company’s defaults on his own assets. This subscription can lead to situations like a home seizure or bank accounts.
Because of the consequences that can be disastrous for the patrimony of the company director, one can only advise too much to the leader to be extremely cautious with this mechanism. However, in some situations, the manager’s surety may appear as the only solution to obtain new funding. The legislator, therefore, has provisions to limit the commitment of the surety.
The choice of the matrimonial regime
In order to limit these consequences, the leader of the company must pay particular attention to his matrimonial regime. It may be in the interests of the couple’s estate to enter into a marriage contract to choose a regime of separation of property or participation in the acquests. These plans protect the property of the spouse of professional creditors. Thus, it is common to attribute the ownership of the private property to the spouse who is not an executive, who owns only the business. Except that the legal regime of the community reduced to acquests applies by default. However, this plan allows creditors of the corporation to seize the property of the principal and his or her spouse. It is, therefore, necessary for the spouses to express their particular will on this point. In practice, this rule can be circumvented by the commitment of the spouse in conditions similar to those of the leader. In this case, the bond is of a civil nature. As such, the surety spouse is protected by the rules of formalism and especially by the principle of the benefit of discussion. It requires the creditor to institute proceedings against the surety only after all the procedural steps have been exhausted. Unless the contract derogates from this principle … Therefore, it would be too advisable to read carefully the bail contract and negotiate the terms with the creditor.
Limitation of the act of suretyship
The manager who stands surety for the debts of his company must measure the financial extent of his obligation, as well as the duration of the latter.
When the bond comes as collateral for a bank loan it is limited as to its amount. Indeed, the guarantee takes into account the principal borrowed, as well as the interests and the possible penalties of delay.
On the other hand, the guarantee can guarantee all the loans that the company could subscribe to the bank. In this case, the manager is a guarantor for all the debts born or to be born because of the activity of the company. Since this guarantee is much riskier for the manager’s wealth, it is prudent for the manager to negotiate with his creditors a maximum beyond which he cannot be hired.
In the same way, the manager must be attentive to the limitation in the time of the guarantee. He vouches for his company precisely because he is the leader of this company. However, even if it ceases to function, the bond does not necessarily end. If the parties have specified a term to the commitment, that is to say, a date beyond which the deposit cannot be committed, the bond is limited in time. On the other hand, if the guaranteed contract does not provide for an extensive term, the manager of the company, without voluntary action on his part, remains engaged beyond the exercise of his functions. He must, therefore, make known to the creditor his willingness to waive this bond. It is up to the banker to subscribe to the new officer a new act of surety. In addition, the French law prohibiting perpetual commitments, the officer may at any time terminate the suretyship contract.
The subscription of a guarantee proportional to the manager’s financial abilities
The law provides that a professional creditor may not rely on a suretyship contract entered into by a natural person whose undertaking was, at the time of its conclusion, manifestly disproportionate to his property and income, unless the assets this security, at the moment when it is called, does not allow it to meet its obligation. This provision benefits the executive person.
The manifestly disproportionate nature must be assessed at the time of the conclusion of the surety bond, but also at the moment the bond is called. It is assessed with regard to the patrimony of the surety. In the case of disproportion, the deposit is discharged of its engagement. It is therefore no longer required to honor the claims of the principal debtor. This point is left to the sovereign appreciation of the judges of the merits.
The implications of collective proceedings and personal recovery
An individual who is unable to meet the commitment to guarantee a debt of the company he or she manages may apply for a procedure to deal with his situation of overindebtedness. Under this procedure, the sums due in respect of the security may be subject to a carry-over or rescheduling, a partial erasure or a total cancellation in the event of the opening of a security procedure. personal recovery without judicial liquidation or closure of a personal recovery procedure with liquidation.
Moreover, in the context of collective proceedings, the manager must be able to anticipate the difficulties of his company and launch a collective procedure from the first financial difficulties in order to avoid judicial liquidation.
Therefore, the guarantor of its company can avail itself of the provisions of the agreement that it is noted or approved, as well as that of the safeguarding plan. On the other hand, in case of reorganization or liquidation, the guarantor can not avail himself of the provisions of the plan.