George Psarakis LL.M. (mult.), PgCert
George Kefalas, LL.M. (mult.), Μ.Sc.
1. The reflection
In our previous briefing notes we have dealt extensively with the issue of guarantor liability (see for example here). In the present case, we will refer to a specific issue related to guarantor liability concerning so-called "additional acts". The period of unbridled lending of all kinds by credit institutions prior to the onset of the financial crisis has been followed by a period in which credit institutions - by providing all kinds of 'facilities' to borrowers - have sought to recover the amounts due on the loans granted. One practice followed by the banks with regard to business loans granted in the form of a mutual account is to convert them into interest-bearing loans. In this way, the bank 'closes' the current account and now retains a claim against the borrower for the payment of the monthly instalments of the interest-bearing loan. In this way, the bank avoids having to close the mutual account and enter this credit on its balance sheet as a 'red loan'. Instead, the capital of the interest-bearing loan is used to repay and close the mutual account and the bank now keeps the interest-bearing loan - which is now 'green' - on its balance sheet and is serviced by the borrower's monthly - usually monthly - payments. In practice, this is done by the signature between the borrower and the credit institution of a so-called 'additional deed' to the original contract. The question arises, however, as to what is the fate of the security provided at the time of the conclusion of the original credit agreement after the occurrence of the abovementioned change? Are the collateral retained even if it is not re-granted or is it cancelled and must it be re-granted? Similar cases have already been heard before our substantive courts and the position of the case law on the relevant issues has crystallised. Indeed, the relevant reflection is not limited to the case of the conversion of a mutual loan into an interest-bearing loan, but extends to any material modification of the original credit agreement by means of an 'additional act'.
2. The concepts of the mutual account and the interest-bearing loan
According to case law, a joint (or open or current) account exists when two persons agree by contract not to pursue or dispose of individually the claims arising from their transactions with each other, but to place them in a joint account to be settled at the periodic closure of that account, which is to take place at certain intervals (usually every three months or six months), in such a way that, depending on the agreement, either the periodic balance (of three months or six months respectively) or only the final balance resulting from the closing of the joint account (termination) is due. Usually in bank mutual accounts there is no obligation to pay the periodic balance, i.e. the amount resulting from the periodic 3-monthly or 6-monthly closure of the account. There is only an obligation to pay interest and the final balance in the event that the credit institution closes the account (i.e. terminates it). There is therefore no agreed phased repayment of the borrowed capital in the mutual account, as there is in an interest-bearing loan.
In contrast, in the case of an interest-bearing loan, the credit institution pays the loan to the borrower and the borrower undertakes to repay it in regular, pre-agreed instalments (which are usually equal). In other words, the borrower makes payments to the lending bank in instalments, fixed in advance - as early as the signing of the contract - by time and by amount to cover the loan granted. This contract is completely different from a credit agreement with a mutual account and therefore cannot be serviced through the latter.
It should be noted that it is irrelevant what name the parties may have given to the contract concluded between them, but the court will decide on the basis of the facts proposed and proved by the parties whether in the present case it is a mutual account or an interest-bearing loan.
Under Articles 847, 848, 849 and 851 of the Civil Code, a person who has guaranteed a joint and several account for the benefit of the borrower - the first debtor is liable, by reason of the ancillary nature of the guarantee, only up to the amount of the original debt for which he provided the guarantee, and not for claims relating to a subsequent contract for which the guarantor did not provide a guarantee.
3. The practice followed by credit institutions and the consequent amortisation of collateral
Α. Repayment of a mutual debt by means of an interest-bearing loan
In practice, as mentioned above, credit institutions in many cases follow the following practice: On the basis of an existing open account credit agreement, they grant a new agreement - which they call an 'additional act' to the original one - a loan equal to the balance of the borrower's debt from the original open account credit agreement. At the same time, a new account is opened to service this loan, usually called a debit or 'TPL' (Term Loan). Then, the amount of the disbursed loan is credited to the current account on the same day, which is now zeroed out as paid (this is also the reality of several court decisions - see e.g. Efthes 1695/2009, MPrHrakl 864/2016, EirHrakl 984/2016 etc.).
In cases such as the above, it is accepted by case law that a new interest-bearing loan agreement completely different from the original mutual account agreement is drawn up. Therefore, in such cases, if the guarantor does not guarantee in writing the repayment of the new loan agreement, he is released from the guarantee agreement, because the original agreement for which he alone had provided his guarantee is no longer valid.
In the judgment of the courts of substance, in cases such as the above, there is a case of a promise in lieu of payment, which is a form of renewal of the contract which results in the extinguishment of the existing obligation under the credit agreement with a mutual account and the creation of a new one under the loan agreement. The amortisation of the original contract, however, simultaneously amortises the rights attached to it, such as a guarantee or a mortgage lien. Only with the consent of the guarantor or the provision of a new guarantee by the guarantor could the guarantee be maintained in favour of the new interest-bearing loan contract. Otherwise, the guarantor is released from the guarantee contract.
Similarly, in order to maintain the mortgage pledge provided by the original debtor, the consent of the original debtor is required when signing the new contract - "additional act", which, however, must be made by a notarial deed and transcribed, otherwise it is invalid (according to the provision of Article 159 par. 1 of the Civil Code - judicial decisions have ruled on this, including the decisions of the Supreme Court 434/2000 and the Supreme Court 782/2000). If no such consent has been given in a notarial deed, the party who has granted the reservation in the original contract may apply for its removal in the course of the interim proceedings.
In such cases, therefore, it is not an 'additional act' of the original contract but a new, completely different contract, which can, under certain conditions, be used not only by the guarantor or the pledgee who is not a party to the new contract, but also by the party who is a party to the original contract. There have already been several judgments in the last three years in which payment orders have been annulled on the grounds of misrepresentation of the reason for payment, i.e. the contract under which the credit institution is claiming the money. If the payment order has been issued on the basis of a mutual account agreement and the creditor proves that this agreement has now been abolished and replaced by a new interest-bearing loan agreement, the payment order is cancelled on the grounds of misrepresentation of cause.
E.g. in the case of the order no. 7402/2015 of the Thessaloniki Single Judgment of the Court of First Instance of Thessaloniki states that 'the latter contract is not part of a single credit agreement but a separate loan agreement, but the cause is not stated in the defendant bank's application for a payment order [...] Therefore, the contested payment order also incorrectly states the cause of payment, since not only is there no reference to a loan agreement, but it is also incorrectly characterised as an additional act of the same credit agreement with a mutual account'. On the basis of these considerations, the court annulled the payment order in question.
Β. Material modification of the terms of a credit agreement
Moreover, there are other cases in which we do not have an interest-bearing loan as an alleged 'additional act' to pay off the mutual account, but a modification of the terms of the mutual credit agreement to such an extent that the contractual relationship is altered so that the guarantor is no longer liable under the new relationship if the guarantor has not also entered into the contract (i.e. if the guarantor has not entered into the contract). In such cases, where the original contract is substantially amended by an agreement between the creditor and the primary debtor, in the absence of the guarantor after the guarantee has been given, the original contract is renewed, which (renewal) also results in the guarantee being extinguished (in accordance with Article 439 of the Civil Code). More generally, the combination of extending the duration of a loan and amending its main terms will usually indicate an intention to renew it. It should be noted that this diagnosis must be based on a fundamentally economic view of the contractual relationship, i.e. it must be examined whether the new agreement between the lender and the original debtor substantially alters the economic identity of the original obligation. As a theorist states in a relevant text: "In some cases, such as an agreement between a lender and a primary debtor in the absence of the guarantor after the guarantee has been given, which changes the content of the principal obligation, it may be difficult to distinguish whether it is a mere modification of the principal obligation, the validity of which (modification) depends, as stated above, on whether or not the guarantor's position is made less favourable, or whether it is a renewal of the original obligation or which (renewal) results in the guarantee being extinguished in accordance with CC 439. It is accepted that it will be a renewal when the content of the original obligation is modified to such an extent that the modification is equivalent to its replacement. In other words, renewal will exist when there is such a substantial change in the terms of the original obligation that its very identity is altered" (see Georgiadis G., The Guarantor's Liability, 2017, p. 242).
A case of material alteration which resulted in the discharge of the guarantor was dealt with by the Athens Court of Appeal in a recent decision, from which the crucial passage is taken: "The possibility of granting credit in foreign currency was provided for the first time by the additional act of 15.3.2001 amending the terms of credit with an open (mutual) account, which was drawn up between the defendant, the primary debtor company and the other of the co-guarantors, and which (additional act) does not bear the signature of the opposing party and is not covered by the guarantee given by the opposing party. [... It should be pointed out that the contract, by which it was made possible to operate the contract in a foreign currency, cannot be considered an additional contract which merely increases the amount of the credit, because in this case the amount of the contract is not increased, but another type of change is made, in accordance with what was stated in legal point II, which is essential, given that the exchange rate of foreign currencies is not fixed and may be influenced by factors which are imponderable and not known in advance, which has a direct effect on the amount of the debt'. We note, therefore, that the guarantor's release was upheld because it was not contracted in what the bank characterized as an "additional deed" to a mutual account agreement, which the court accepted as a material change in the terms of the original contract.
C. Conversion of a mutual loan into an interest-bearing loan by means of an agreement to pay an interest-bearing instalment
In addition, a guarantor is also discharged when the mutual debt contract is now agreed to be maintained by means of a 'MORTGAGE LOAN', since in the legal world we have a cancellation of the mutual debt contract and the establishment of a new interest-bearing loan contract. The alleged debt balance is no longer due under the mutual debt agreement, but under the interest bearing loan agreement on the basis of a newer agreement between the debtor and the bank. In simple terms, the mutual debt contract is converted into an interest-bearing loan contract and the repayment of the balance is arranged in equal, usually interest-bearing instalments (sometimes the instalments are not equal but have a fixed amount of principal and a variable amount of interest). The alleged 'additional transaction', usually called a 'loan repayment agreement', is an agreement to repay the amount due on the mutual account in instalments, including not only interest but also principal. However, as the Court of Auditors has already stated in a relevant decision: "... an interest-bearing loan agreement, that is to say, one under which the counterparty makes instalments to the lending bank, fixed in advance by time and by amount, to cover a loan granted, is completely different from that of a current account, and the payments from an interest-bearing loan cannot, by their very nature, be serviced by keeping an open account, since the entire debt is not due from the outset and for that reason: (a) each instalment is distinct from the others and retains its autonomy and independence, and it is not possible to monitor it as part of a heterogeneous whole, containing both principal and unpaid debts, but also funds of the same account, (b) it is not possible to close the account periodically and to accumulate the entire balance every six months, because each instalment of the interest-bearing loan also contains unpaid interest, which cannot be accumulated. Any arrangement whereby the interest-bearing loan is regarded as an open account is unlawful, since it is made with the manifest intention of granting the bank indirect and impermissible benefits under Article 112 of the Income Tax Code, in particular the six-monthly compounding of interest (Case 3078/2002 IEE 2003, 958)'. Therefore, also in these cases, where we have a "LESSOR" signed only by the primary debtor and not by the guarantor, the latter is relieved of his guarantee responsibility. This is because the guarantor had assumed the responsibility of repayment of the debt under the contract of mutual debt and not under any other more recent contract, such as in this case the contract of an interest-bearing loan.
Guarantors, third parties who have pledged a mortgage under a credit agreement and first mortgagees must be particularly careful when the credit institution takes action against them by way of a payment order, particularly where additional acts of amendment to their original agreement have taken place in the meantime. Newer amending contracts which are not only additional - increasing the credit limit but also constitute amendments to other terms of the original contract may lead to a discharge from liability (in respect of the guarantee or the pledge) or may support defects in the payment order issued. This is also in line with common sense and common sense of law: where the guarantor has provided a guarantee for a specific contract with specific conditions and a specific method and time of repayment, it is not acceptable in law that, without his written agreement, he should be considered to continue to be liable under new contracts for the replacement or substantial modification of the current account which the credit institution has 'christened' additional transactions.