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Consequences of the Debtor’s Insolvency to the Guarantor ...4. Conclusion
When Guarantor is guaranteeing to be liable for the debt of a legal person, who can be, for example, legal persons or partnerships, or individual merchant and a person who performs permanent economic activities in Latvia although he is registered in a foreign country, to a creditor, he takes a risk that the debtor can go insolvent. If the guarantor would be released from his contractual duty just because of the insolvency of a legal person, it would be entirely against the aim of guarantee. Moreover, when principal debtor ceases to exist, guarantee becomes an independent obligation and creditors claim – independent claim. The Senate of Supreme Court of Republic of Latvia specified this in the case Nr.SKC-86/2011 of April 27th 2011.
From one prospective the aim of a guarantee is to ensure the performance of the principal debtor’s obligations, which gives the creditor the right to ask the performance of obligations from the guarantor in case the principal debtor does not perform his or her obligations. Although, a guarantee is an ancillary obligation that cannot exist without the principal obligation, an exception from the principle of guarantee accessority is acceptable if it contradicts with the aim of a guarantee.
Latvian Insolvency Law provides that at the end of the performance of the plan for extinguishing obligations by the principal debtor, the remaining obligations of this person shall be extinguished and execution proceedings for the recovery of the extinguished obligations shall be terminated. As the principal debtor usually covers only a small part of his or hers debt, such performance of the plan for extinguishing obligations cannot be considered as a ground for termination of the guarantee.
Furthermore, the Latvian Civil Law provides that a guarantee shall be terminated by any event or action that releases the principal debtor, however, the performance of the plan for extinguishing obligations cannot be considered as such event or action.
It is important to note that the agreement on guarantee between the creditor and the guarantor is a prerequisite for conclusion of the loan agreement between the creditor and the principal debtor. This view has also been supported by the Insolvency Administration.
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In the period of recession in the country after the booming economic success, a part of society experienced financial problems due to the cuts in wages or even lost jobs. The number of borrowers, who encountered difficulties with the repayment of the loans, soared dramatically and therefore the government came up with the Insolvency Law of 1st November, 2007. With the rise in a number of insolvent persons, the number of guarantors refusing to pay climbed too, and the question, whether the guarantor should be responsible for the debts of the principal debtor, if the principal debtor has become insolvent, arose. principal debtor, if the principal debtor has become insolvent, arose. As to legal persons, until now it has been made quite clear - if the principal debtor, a legal person, has been liquidated due to insolvency, the creditor can turn to the guarantor. The guarantor cannot object, claiming that if the principal debtor no longer exists than the debt too ceases to exist and the guarantor’s liability ends. Quite the opposite, the court has repeatedly decided that termination of the debt after insolvency of a legal person is an exception from the guarantee accessority principle. In case of insolvency proceedings of a legal person a guarantee stops being an ancillary obligation and becomes an independent, principal obligation. Shall a guarantee become a principal obligation in case of insolvency proceedings of a natural person? This and other questions are examined in this study work.
- Consequences of the Debtor’s Insolvency to the Guarantor in Latvia
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