1 Who is a guarantor?
A guarantor is one who gives security for a debt. It is a term used to describe an individual who undertakes to pay a borrower’s debt in the event that the borrower defaults on his loan obligation by pledging his assets as collateral against the loan.
In the case of Auto Import Export v Adebayo (2005) 19 NWLR (Pt. 959) 44, a guarantor was equated to a borrower/debtor because where the principal debtor fails to pay a debt, the guarantor will be called upon to pay the loan so guaranteed.
However, a guarantor’s liability does not begin until the principal debtor/borrower is in default. The liability of the guarantor crystallises immediately the third person is unable to pay its outstanding debt.
2 What is a guarantee or a contract of guarantee?
Guarantee means a written undertaking made by one person to another to be responsible to that other person in the event that a third person fails to perform a certain duty.
A contract of guarantee is a contract where a person known as guarantor or surety promises or undertakes to settle or pay the financial indebtedness of the principal debtor/borrower to the Lender/creditor where the principal debtor is not able to pay the debt.
The court in the case of Amede v. U.B.A. (2008) 8 NWLR 629 defines guarantee to mean a written undertaking made by one person to another to be responsible to that other if a third person fails to perform a certain duty.
3 What are the Obligations of a guarantor?
i A guarantor is bound to ensure borrower’s repayment of the loan is in accordance with the loan agreement
ii A guarantor may be called upon to repay the loan in full if the borrower defaults on repayments.
4 What is the liability of a guarantor where the Borrower defaults in repayment of the loan?
The liability of a guarantor was illustrated by the Supreme Court of Nigeria in the case of C.B.N. v. Interstella Comm. Ltd. (2018) 7 NWLR (Pt. 1618) 294 @ 338, para. B where the Court held as follows:
“A guarantor is technically a debtor because where the principal debtor fails to pay his debt, the guarantor will be called upon to pay the money owed. However, the fact that the obligations of the guarantor arises only when the principal debtor has defaulted in his obligations to the creditor does not mean that the creditor has to demand payment from the principal debtor or from the guarantor or give notice to the guarantor before the creditor can proceed against the guarantor; nor does the creditor have to commence proceedings, whether criminal or civil, against the principal debtor unless there is an express term in the contract requiring him to do so.”
5 Can a Lender proceed against a guarantor without recourse to the Borrower where the borrower defaults in repayment of loan?
A contract of guarantee can be enforced against the guarantor directly or independently withoutthe necessity of joining the principal debtor in the proceedings to enforce same. The supreme court affirmed this position in the case of Yemole (Nig.) Ltd. v. Access Bank Plc (2020) 17 NWLR (Pt 1752) 79, when it held that the right of a creditor is not conditional as he is entitled to proceed against the guarantor independently without joining the borrower.
Also, in the case Crown Flour Mills Ltd v Olokun (2008) 4 NWLR at page 298 Para F-Hthe court held thus:
“…….in a contract of guarantee, the law has moved to the center to make right of the creditor to so proceed against the guarantor less conditional….. a creditor is entitled to proceed against the guarantor without or independent of the default of the principal debtor.”
A guarantor is directly liable to liquidate the debt of the principal borrower, in the event that the principal borrower defaults or refuses to honour his repayment obligation.
In fact, it is of no moment whether or not the guarantor benefited from the loan granted to the principal borrower; it is sufficient that there exists a (contract of) guarantee from the guarantor and the principal borrower has defaulted in his repayment obligation.
6 What are the implications of being a guarantor?
a Once a debt has accrued and a guarantor has been called upon by the lender, the guarantor becomes directly liable to the creditor independent of the borrower’s liability to the lender. The Lender can choose to proceed to recover the loan from the guarantor without approaching the principal debtor.
b by agreeing to guarantee a loan, a guarantor limits his own ability to borrow from financial institutions until the guaranteed loan has been repaid as likely financiers will see the loan as a liability of the gurantor.
c a guarantor also risks destroying his own credit rating if a borrower defaults and the guarantor is unable to repay the loan himself.
d. a guarantor is liable for both the principal and interest accruable upon the loan guaranteed.
7 Can a guarantor be discharged of his liability under contract of guarantee?
Yes, a guarantor will be discharged of liability upon the satisfaction of the conditions as contained in the loan agreement. In the case of F.B.N. Plc v. Songonuga [2007] 3 NWLR (Pt. 1021) 243, the court held that a guarantor can only be discharged of his liability under contract of guarantee in the following four circumstances:
(a) where his obligation under the guarantee contract has been satisfied;
(b) where the principal debt has been extinguished by an act or acts of the parties;
(c) where a limitation or prescriptive period has elapsed;
(d) where a court applies a presumption which operates to terminate the contract of guarantee.
8 When does the liability of guarantor arise and is there a requirement to make a written demand?
The liability of the guarantor crystallises immediately the borrower/debtor is unable to pay its outstanding debt. In the case of C.B.N v Interstella Comm. Ltd. (2018) 7 NWLR (Pt.1618) Page 294 at 308, the Supreme Court held that:
“A guarantor is technically a debtor because where the principal debtor fails to pay his debt, the guarantor will be called upon to pay the money owed. However, the fact that the obligations of the guarantor arise only when the principal debtor has defaulted in his obligations to the creditor does not mean that the creditor has to demand payment from the principal debtor or from the guarantor or give notice to the guarantor before the creditor can proceed against the guarantor, nor does the creditor have to commence proceedings whether criminal or civil, against the principal debtor unless there is an express term in the contract requiring him to do so.”
In a contract of guarantee, the liability of the guarantor to the creditor arises when the debtor defaults, and time begins to run in favour of both the Borrower and the Guarantor from that moment, unless otherwise agreed.
If the surety or guarantor undertakes to pay on demand, the money lender’s cause of action accrues when a written demand is made and not complied with. This was exemplified in the case of I.D.S Ltd. v. A.I.B. Ltd. (2002) 4 NWLR (Pt. 758) 660 in which the court declined jurisdiction to hear the appeal and dismissed same.
In the above case, the Court held that the action against the 3rd appellant as a guarantor would only arise when the 1st appellant (borrower) fails to pay the loan (and interests) as it is liable to pay under the agreement and consequently, since the 3rd appellant did not have the demand or pre-action notice served on him by the respondent, the action against the guarantor was declared premature.
9 What are the key issues to consider before accepting to be a guarantor?
A guarantor should know the purpose of the loan to be guaranteed.
It is also important for a guarantor to determine the amount of the loan and if he/she can afford to cover repayment amounts should the borrower default on loan repayment.
A guarantor should know the duration for repayment of the guaranteed loan.
A guarantor should know the provisions contained in the loan contract especially clauses relating to interest rate, fees and charges, installment amount and default penalty (if any).
A guarantor should know what asset to be used as security for a loan.
A guarantor should consider seeking independent legal advice before signing a guarantee contract.
10 How can a guarantor protect himself against liability?
i A guarantor may limit his guarantee to a particular sum in order to be liable to liquidate the debtor’s indebtedness only to the extent of his undertaking. In such circumstance, the money lender cannot recover from the guarantor any sum beyond the guarantor’s undertaking.
ii A guarantor should ensure that a loan agreement and all other relevant documents relating to the loan granted to the borrower are personally and properly scrutinized by the guarantor or guarantor’s legal representative and ensure he has copies of all relevant documents in respect of the loan for record purposes.
iii A guarantor should carry out proper due diligence in other to ascertain the purpose of the loan and where the loan is sought by a corporate body, a guarantor should ascertain the the alter-ego of the corporate body. This will help the guarantor to know whether the borrower is of reputable character and the ability to utilize the loan for the purpose for which it has been given.
iv A guarantor should also maintain contact with the borrower in order to avoid a situation where the borrower cannot be located by either the creditor or the guarantor when repayment is due. This is important because the guarantor also reserves the right to proceed against the principal debtor upon the discharge of the indebtedness to the creditor.
v A guarantor may also request to be a co-signatory to the loan account so as to help regulate and monitor the account and ensure same is not diverted for other purposes other than for the reason it was granted.
11. When can a guarantor terminate his guaranteeship?
i When fraud is detected, or there is misappropriation of the loan sum or where loan is diverted for other personal reasons, the guarantor can notify the money lender and demand for a release of the obligation in the guarantee. However, this may be difficult owing to the fact that the borrower has already taken benefit of the loan. Fraud in this context may consist of suppression, concealment or alteration of the contract without the knowledge of the guarantor.
Ii Where the guarantor was deceived into entering a guarantee contract, such a contract may be vitiated on the ground of misrepresentation, mistake of facts and fraud. This however will only be applicable if it is proven that the money lender was aware or in connivance with the borrower.
iii Where the consent of the guarantor was obtained by inducement or duress, the guarantor may terminate the guarantee contract on such basis within a reasonable time after entering into the contract of guarantee. The guarantor will be discharged if the money lender was aware of the inducement or part of the exertion of duress.
