It is not uncommon for relatives or friends to be asked to be someone’s guarantor for a loan, whether it be for a small personal loan, a mortgage, or even for a huge business financial transaction.
Majority shareholders and top officers of corporations are commonly required to sign as guarantors for the company availing of loan facilities with banks. By guaranty, a person called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.
A guarantor is an insurer of the debt and essentially guarantees that the debt will be paid one way or another. Most people confuse a guarantor with a surety, another distinct concept under our laws. But unlike a guarantor, a surety does not only insure the debt, he or she can be compelled to pay the loan in the first instance. There is no need to prove that the debtor has no ability to pay.
The difference between the two lie in the availability of the benefit of excussion. This is found in Article 2058 of the Civil Code which provides that the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.
The main consideration is not the title of the agreement or the term used to describe the person agreeing to answer for the debt, but the terms of the agreement and the nature of the liability undertaken by the guarantor. This is well illustrated in the case of Trade and Investment Development Corp. of the Philippines (TIDCORP) vs Philippine Veterans Bank (GR 233850, 1 July 2019).
In that case, petitioner TIDCORP executed a Guarantee Agreement for the benefit of the principal debtor, PhilPhos, arising from its obligations with respondent PVB. PhilPhos filed a Petition for Voluntary Rehabilitation under the Financial Rehabilitation and Insolvency Act of 2010 (FRIA), resulting in the issuance of a Commencement Order, which included a Stay Order. PVB filed its Notice of Claim with TIDCORP. The latter denied the claim, invoking the Stay Order which supposedly stayed along claims against PhilPhos, the principal debtor in the Guarantee Agreement.
The Supreme Court ruled that under Section 18(c) of the FRIA and the SC Interim Rules of Procedure on Corporate Rehabilitation, a stay order shall not apply to the enforcement of claims against sureties and other persons solidarily liable with the debtor. The stay order has the effect of staying enforcement only with respect to claims made against the debtor, its guarantors and persons not solidarity liable with the debtor. In other words, the Stay Order cannot be invoked by a surety but can be invoked by a guarantor.
In a true contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case he fails to do so. A guarantee is characterized by the benefit of excussion where the creditor must first exhaust all the property of the debtor and resort to all the legal remedies against the debtor before collecting from the guarantor. If this benefit of excussion is waived, the guarantor is directly made liable; hence, the arrangement is not a guarantee but a suretyship.
While the document in the said case is entitled a “Guarantee Agreement,” it provides that TIDCORP had waived its right of excussion under Article 2058 of the Civil Code. Hence, PVB can claim directly against TIDCORP without having to exhaust all the properties of PhilPhos and without need of any prior recourse against PhilPhos. Notwithstanding the Stay Order, the claim under the Guarantee Agreement can proceed.
To summarize, a surety is one who directly, equally, and absolutely binds himself/herself with the principal debtor for the payment of the debt. In contrast, the contract of guaranty is its subsidiary character. The guarantor only answers if the debtor cannot fulfill his obligation, unless he waives the benefit of excussion. A surety is principally liable, while a guarantor is only secondarily liable.
First published on The Daily Tribune.
For further information, please contact:
Nilo T. Divina, Managing Partner, DivinaLaw
nilo.divina@divinalaw.com
