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Dear clients and cooperation partners,
In this Latvian Banking & Finance Newsflash, we will explain (i) guarantor's liabilities and responsibility in cases of debtor's insolvency risk; (ii) the need for a licence plus the procedure for obtaining it by limited liability companies or joint stock companies providing consumer credit services; (iii) the new wording of the International Chamber of Commerce (ICC) Uniform Rules for Demand Guarantee.
INSOLVENCY RISK – WHAT CAN BE CLAIMED FROM A GUARANTOR IF THE DEBTOR IS INSOLVENT?
Now in the mass media news about overcoming the economic crisis, economic recovery and increase in the number of transactions alternates with concerns for a repeat of the economic crisis. Thus creditors will still be interested in sureties. It may seem that issuing a surety is a comparatively simple procedure because it involves signing just a couple of documents. However, it is not so simple because at the moment when the debtor is unable to perform its liabilities, the creditor will demand settlement from the guarantor. Usually the guarantor’s responsibility is limited. It is closely related to the debtor’s responsibility for payment of the debt or performance of other liabilities. This means that the surety is limited by the sum that can be claimed from the debtor personally. In most cases the guarantor will be able to bring the same objections that can be brought by the debtor. If the debt payment is limited by some condition then this condition will also apply to the surety even if that is not specifically agreed upon. Moreover, the surety ceases to exist when the main liability ends (by paying the debt, entering a settlement or revocation agreement) or by any event that releases the debtor from liability.
Expiry of the surety together with the debtor’s deregistration from the Commercial Register by finalising an insolvency procedure has been a disputable question. It can be concluded from the wording of Section 1712 of the Civil Law that a surety is terminated when the debtor ceases to exist and the creditor may not claim payment from the guarantor. Nevertheless the Senate of the Supreme Court has indicated that this conclusion does not comply with the aim of a surety – by granting a surety the guarantor undertakes also to be responsible for the debtor’s liability (debt) if the debtor faces financial difficulties or insolvency. Therefore the Senate of the Supreme Court concluded that where a company is deregistered from the Commercial Register by finalising the insolvency procedure, the surety turns from an ancillary liability into a direct liability, while at the same time the creditor’s claim against the guarantor also becomes independent. In other words, in the case of a debtor’s insolvency creditors will also be allowed to claim performance of liabilities from guarantors after deregistration of the debtor from the Commercial Register. So, any person issuing a surety must be even more cautious and must be aware that they will not be allowed to rely on a formal interpretation of the law to avoid responsibility in the case of the debtor’s insolvency.
Santa Selga
A LICENCE WILL BE NECESSARY TO PROVIDE CONSUMER CREDIT SERVICES
Starting from 1 November 2011, limited liability companies or joint stock companies providing consumer credit services will need a licence. A licence will be necessary for services with the following features:
(a) the service is provided to a consumer (natural person); and
(b) this service is not related to the customer’s business or professional activities; and
(c) the service consists of grant of credit or promise of credit in the form of a deferred payment, loan or other similar financial arrangements.
Although a consumer credit service includes the general expression “other similar financial arrangements”, this service still needs the features of a loan (for example, financial leasing). A licence will not be needed if, for example, one loan is given to one consumer because this activity cannot be considered as service provision. A licence will not be necessary for banks, loan and savings companies, companies offering settlement of payment for purchase of goods or services in the form of a deferred payment, loan or similar financial arrangement without attracting third party funds (for example, a seller offers a product on leasing and the consumer pays the seller for the product by instalments) and in cases of concluding a consumer credit agreement where no interest or other additional payments are paid. It must be noted that if a licence is not necessary then the company concerned must still observe regulatory enactments with regard to protection of consumer rights (for example, by avoiding applying unfair contract provisions to consumers that are expressed, for instance, in providing disproportionate contractual penalties in contracts).
To obtain a licence, certain requirements should be met (for example, documents must be prepared to determine the procedure for providing credit and supervision of already issued credits, procedure for evaluating the consumer’s ability to repay credit, procedure for reviewing consumer complaints and the like). Additionally, management and supervisory board members of the company must comply with certain requirements. Licences will be issued by the Consumer Rights Protection Centre (CRPC). The licence will be issued for a year and each year it must be re-registered. State duty will be payable for issue and re-issue of the licence – LVL 50,000 (approx EUR 71,145) for issue of a licence, and LVL 10,000 (approx EUR 14,230) for re-issue. As the decision on a licence is made by the CRPC within a month after receipt of all necessary documents, then it is advisable for companies already providing consumer credit services not to delay filing all necessary documents with the CRPC. It should be noted that the CRPC is already reviewing several applications, and in the nearest future the CRPC website will possibly publish information about the first companies to receive a licence.
Inese Heinacka
NEW ICC UNIFORM RULES FOR DEMAND GUARANTEES (URDG 758)
On 1 July 2010, the most recent publication of Uniform Rules for Demand Guarantees URDG 758 came into force. URDG 758 are the result of a fundamental review by the International Chamber of Commerce (ICC), they are more precise, more comprehensive and have a more balanced approach to the interests of the guarantor and the beneficiary compared to their predecessor URDG 458, adopted by the ICC in 1991. Therefore, when issuing a demand guarantee it is advisable to include express reference to URDG 758.
As opposed to a surety specifically regulated by the Civil Law, a guarantee subject to URDG is by its nature independent of the underlying relationship between the beneficiary and the debtor on which the guarantee is based and independent of the relationship between the guarantor and the applicant for issue of the guarantee. This feature gives the beneficiary a considerable advantage compared to a surety because once a guarantee is issued the undertaking of the guarantor to pay under the guarantee is not subject to claims or defences arising from any relationship other than a relationship between the guarantor and the beneficiary. However, in order to benefit from all favourable features of a guarantee it is not sufficient merely to change the heading of a surety to a guarantee. Rather, it is important to understand how these rules apply in the interests of the parties involved and expressly subject the guarantee to URDG 758.
The purpose of a demand guarantee is to facilitate the rights of the beneficiary to receive the sum of money claimed without having to lengthily prove grounds for payment of the guarantee and the amount of the sum claimed. If a guarantor receives a demand to pay under the terms of the guarantee, then having inspected the demand together with supporting documents and having concluded that on their face these comply with the terms of the guarantee, the guarantor must pay without objection and without verifying the validity of the reasons behind the demand. The new URDG 758 sets more effective rules to serve the above purpose of a demand guarantee.
In Latvia banks usually issue guarantees; however there are cases when, for instance, parent companies issue guarantees for performance of the liabilities of their subsidiaries.
Santa Selga, Inese Heinacka |
