Bank guarantees

A bank guarantee is a contract in which a bank guarantees the payment of a certain (maximum) amount to a specified beneficiary during a specified period, provided that certain conditions are met. The conditions are generally formal, i.e. the request to pay must be made in writing, and should (or need not, as the case may be) include a statement that the debtor has failed to meet its obligations to the beneficiary.

In theory, a bank guarantee is an abstract concept, completely separate from the underlying legal relationship between the bank and its customer. The bank is not entitled to deny a request to invoke a guarantee: the principle here is 'first pay, then talk'. Although the bank is also not required to ascertain whether the debt in question is indeed due and payable, the text of a bank guarantee may contain one or more conditions that must be fulfilled in order for the guarantee to be honoured. In order to work, these conditions must be expressed very clearly in the wording of the guarantee. If this is not the case, the courts will be more likely to regard the document as an abstract bank guarantee.

The bank can refrain from paying the guarantee only if the claim is patently arbitrary or false. If you suspect that either the claimant or the beneficiary is acting in an arbitrary or deceitful manner, you should act quickly and ask your bank (preferably in writing) not to pay out. You should give the bank all the information you have on which you have based your conclusion that the guarantee claim should not be honoured. You should bear in mind, however, that it is in a bank’s interests – in order to ensure that businesses can operate and make payments as normal – not to raise any objections when a bank guarantee is invoked.

A bank guarantee often includes a counter-guarantee, i.e. a declaration by the principal that it will repay the bank the total value of the payment made by the bank to the beneficiary under the terms of the guarantee. This may also be done in other ways, for instance by freezing certain funds in the borrower’s bank account (corresponding with the maximum value of the bank guarantee) or by establishing a right of pledge (pandrecht in Dutch) or a right of mortgage.

Suretyship and guarantees

As a company director, you may have given the bank a personal guarantee as security for your company’s debts. But what if you act as a guarantor for one of your suppliers? Given that you cannot exert any control over your suppliers, this is something that entails risks. What should you do if you are then sued by a creditor?

A guarantee or suretyship

The first step is to establish whether you have indeed provided a guarantee. Have you signed a contract of suretyship for a debt ( the ‘principal debt’) owed by a third party (the ‘principal debtor’)?


A contract of suretyship is known as a ‘contingent’ guarantee. In other words, once the principal debt ceases to exist – once it has been paid , for instance – the guarantee also ceases to exist. The contingent nature of a suretyship implies that you may be sued by a new creditor to whom the debt in question has been assigned.


You may invoke all the defences that the principal debtor may invoke. If the principal debt has expired, you may plead prescription. However, there is an inherent risk here that, if you fail to invoke a certain defence against the creditor, even though it was available to the principal debtor, the latter may then invoke the same defence against you. So you are well-advised to request the principal debtor to supply you with a written list of the defences.

Subsidiarity and recourse

A guarantee is known as an ‘alternative obligation’, which means that you are not required to meet your obligations as a guarantor until the principal debtor is in default. Once you have paid the amount involved, you may sue the principal debtor, on condition that you inform the principal debtor before he himself repays the debt. If you’re too late and the principal debtor has already paid the creditor, you will not be entitled to have recourse against him. In that case, the principal debtor will have a claim against the creditor on the grounds of an undue payment. He may transfer this claim to you, so that you can seek repayment from the creditor.

Parent company guarantees

A parent company guarantee is similar to a suretyship. The first step is to bring a claim against the debtor in question. In principle, the party who has issued the guarantee has the same rights and defences as the debtor. Although, unlike a bank guaran, a parent company guarantee does not necessarily work on the principle of 'first pay, then ', it can be designed to do so. Another important consideration is whether you only require a payment guarantee or whether the guarantee should cover other obligations (in which case it is a ‘performance guarantee’).

By issuing a parent company guarantee, a parent or holding company indicates its willingness to vouch for the creditworthiness of its subsidiary. The scope and duration of the guarantee, and the conditions to which it is subject, depend on how precisely it is worded . A guarantee may be restricted to certain legal relationships. It may also be restricted in time and it may be subject to a ceiling. It need not be an unconditional, unrestricted guarantee for a subsidiary’s obligations, although it could be. Where the guarantee is intended to cover a landlord-tenant relationship, it should be explicitly stipulated that it also applies to losses caused by the premature termination of the rental contract as a result of the tenant’s bankruptcy.


Greater security for you

Are you sick and tired of debtors using you as an interest-free overdraft facility? Thoroughly cheesed off though you may be, you’re not ready for time-consuming court proceedings. In that case, a right of pledge may be the solution. This may sound like something that’s more suited to a bank, but you too can use it to your advantage.

Let’s imagine that you’re on the point of calling in the debt collectors to collect one of your debts. In that case, try inviting your debtor to one final meeting at which you suggest that he offers you security for his debt in the form of a right of pledge. A right of pledge is a security that can be established not just on movable property, but also on sums of money that your debtor might be owed by other parties.

A right of pledge has two great advantages. The first is that you are entitled to something known as ‘summary execution’. For instance, if you have a right of pledge on a car and the debtor fails to repay his debt to you, you are entitled to sell the car and to use the proceeds to settle your debt.

The second advantage is that you will have the status of a secured creditor if your debtor is declared bankrupt. Going back to the previous example, the car would normally form part of the bankrupt estate. However, if you hold a right of pledge, you will be entitled to withdraw the car from the estate and sell it to repay your debt. As an added advantage, the right of pledge ‘follows’ the car: in other words, if your debtor sells the car, you retain your right of pledge vis-à-vis the new owner.

Article 403 statements

For better or for worse

Groups of companies often issue something known in Dutch law as an ‘Article 403 statement’, i.e. a statement subject to Article 403 of the Dutch Civil Code. This exempts individual group companies from the obligation of preparing and publishing a separate set of financial statements, on condition that the parent company issues a written statement accepting liability for its subsidiaries’ debts. The Article 403 statement is filed at the local Chamber of Commerce (in the Trade Register). The statement lists the debts of each subsidiary for which the parent company is liable, and states the dates as from which this liability applies.

Not just large international companies, but also small groups (consisting of just two private limited companies, for instance) make use of this type of statement.

If your company issues an Article 403 statement, you should remember that, if one group company gets into trouble, this will also affect the other members of the group. Indeed, the group may be unable to bear the strain and go under as a result. In the event of the group having to be reorganised, it is essential to ensure that the obligations resulting from an Article 403 statement are properly discharged, so that the other members of the group are given a safe passage to a secure future.

If you hear that one of your debtors is in financial difficulty, do find out whether it is the subject of an Article 403 statement. If it is and if the company goes into liquidation, you should be able to pursue a claim against the parent company for the full repayment of your receivable.

Our lawyers are highly experienced in dealing with Article 403 statements. Acting as we do regularly both as advisors to companies subject to such statements and as receivers, we are familiar with both sides of the coin and can supply you with precisely the type of assistance you need.

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