Surety in bank crediting

Alexey Sidorov

Associate of the Law Firm "YUST"

Surety agreements are a common way to secure the debtors’ obligations to creditors. However, the banks do not always perceive those as a safe means of protection of their rights and prefer issuing credits against the borrower’s property. The cause of this is the fact that the sureties successfully contest the validity of the surety agreements after the duty to bear the obligations, non-performed by the borrower, arises.

Legal uncertainty of the matters of validity of surety agreements executed in regard to the obligation delayed on by the borrower, of the surety agreement’s surviving the termination of the credit agreement and when amendments are made to the terms of the credit agreement without the surety’s approval are among the reasons to go to court.

The Plenum of the Higher Court of Arbitration of the Russian Federation (hereinafter – the HCA of Russia) adopted last summer the Resolution No. 42 “On certain matters of settlement of disputes involving sureties” dated 12.07.2012 (hereinafter – the Resolution No. 42), which cleared the matter some.

Following the legal position of the Plenum of the HCA of Russia, the surety agreement executed in regard to the obligation delayed on by the borrower is valid. Its execution in regard to the obligation delayed on by the borrower (for example, the repayment of the credit amount with the respective interest) allows, on one side, safeguarding the interests of the bank, and on the other side – providing the borrower with the second chance to perform his obligations under the credit agreement.

Moreover, the execution of such agreement is not a reason to rule it an invalid transaction (clause 3 of the Resolution No. 42). It should be pointed out that many experts don’t believe the justification of that postulate is convincing. In particular, the HCA of Russia only refers to the absence of any ban on such agreements in the Civil Code of the Russian Federation.

Though the Board of the Judges of the HCA of Russia used to take the opposite position and justified it alleging that said agreement is, in essence, the acceptance of another person’s debt by the surety, which goes directly against the legal nature of the surety. <…>

Continued here:

The source of the publication: Banking Survey magazine, October of 2013.