New rules on suretyship and consumer guarantees

With the entry into force of Title 1 of Book 9 of the new Civil Code, the framework governing personal securities has undergone a significant update. Whereas the former legislation primarily focused on gratuitous sureties, the new framework now provides a statutory basis for various forms of security that had previously been developed mainly through case law and legal doctrine.

At the same time, a broad degree of contractual freedom remains, as most of the new provisions are default rules.

Suretyship

In the context of M&A transactions, it is advisable to consider the principal changes and their practical implications. The most important developments are outlined below.

Statutory basis for suretyships covering future obligations

A suretyship may now expressly be granted in respect of future obligations. Although this was already accepted in practice, it is now formally embedded in legislation.

Several important conditions apply:

• the guaranteed obligations must be sufficiently ascertainable at the time the suretyship is entered into;

• the surety is protected by a maximum amount (in the absence of such a limit, the suretyship only covers obligations existing at the time of execution);

• the guaranteed obligations must be connected to the contractual relationship between the creditor and the debtor.

As a general rule, the surety is therefore not liable for claims arising from a different legal basis, such as tortious liability.

Termination regime for indefinite-term suretyships

The law now also introduces a specific regime for indefinite-term suretyships.

The underlying principle remains that no person may bind themselves for an unlimited period. Consequently, an indefinite-term suretyship may generally be terminated at any time, subject to a reasonable notice period.

After the expiry of that notice period, the surety remains liable for existing obligations but not for new debts arising thereafter.

Multiple sureties

Where several persons act as sureties for the same debt, they are regarded vis-à-vis the creditor as jointly and severally liable debtors within the limits of their respective undertakings.

This means that each surety may be held liable for the full amount owed.

However, the subsidiary nature of suretyship remains intact. The creditor must first pursue and formally notify the principal debtor. Only if payment is not made may the creditor seek recovery from one or more sureties.

Impact of restructurings

Under the new law, a suretyship no longer automatically extends to the debts of legal successors following a merger, demerger, or transfer of business activities. Such an extension is possible only if it has been expressly provided for in the contract.

This prevents a surety from unexpectedly becoming liable for the debts of a successor entity without any prior agreement to that effect.

Companies that regularly engage in acquisitions, reorganisations, or group restructurings should therefore critically review their existing suretyship arrangements.

In practice, it will be important to assess suretyship agreements against the considerations outlined above, to the extent that they fall under the new legal framework. As noted, many of the new provisions may be contractually varied, while other agreements remain governed by the previous legal regime.

Consumer surety or gratuitous surety

In addition to the general suretyship regime, the former “gratuitous surety” has been re-regulated under the designation of consumer surety. The protective rules applicable to consumer sureties are mandatory in nature and cannot be contractually excluded.

The key question is whether the provider of the personal security qualifies as a “consumer.” The Code of Economic Law defines a consumer as “any natural person acting for purposes outside their trade, business, craft, or professional activity.”

The decisive factor is the status of the security provider at the moment the security is granted.

What does this mean for directors and shareholders?

In an M&A context, the question arises whether individuals who are directors or shareholders of a company and who provide sureties for its debts may rely on consumer surety protection.

Under the new law, a security provider who exercises substantial influence over the decision-making of the principal debtor is expressly excluded from the scope of the consumer surety regime.

For the interpretation of the concept of “substantial influence,” reference is made to the concept of “control” under the Belgian Code of Companies and Associations. This suggests that directors and shareholders of the principal debtor generally fall outside the scope of the consumer surety regime.

In practice, consumer surety protection will therefore play only a limited role in suretyships granted by corporate insiders.