- The case concerned a dispute between individuals as guarantors in a credit agreement serviced by a mutual account and the credit institution that granted the credit. Due to the inability of the primary debtor to pay the debt, the bank issued a payment order which it served on the primary debtor and the guarantors by cheque for payment. The guarantors filed an objection to the payment order and an application for a stay of execution in order to prevent the bank from proceeding with enforcement against their property.
- The proper support of the case resulted in the suspension of the enforceability of the payment order in the first instance and in the final annulment of the payment order in the second instance, after which the bank never returned to pursue its alleged claim.
- The guarantors obtained temporary protection against any enforcement and subsequently obtained the annulment of the payment order at the Court of Appeal. In fact, the judgments in both the judgment on the stay application and the judgment at first instance found in favour of extinguishing their liability under the guarantee.
Individuals had provided a guarantee under a credit agreement with a mutual account. A few years later, an additional act was concluded between the creditor bank and the original debtor in the above credit agreement, increasing the credit limit. Subsequently, another additional act was signed, entitled 'Additional act - Contract for granting a debit loan using an open account agreement with or without a grace period and with interest sharing'. The latter act granted the original debtor a new loan, which repaid the balance of the mutual account and provided that it would be repaid in monthly installments (each installment would pay part of the interest and part of the capital) of a certain amount. In fact, although the contract was titled as an additional act, it was not numbered accordingly (i.e. it was not titled as an additional act under the number 'additional act'). 2), while the provisions contained in the agreement in fact put the position of the principal debtor - and therefore of the guarantors - at a disadvantage, since the principal debtor was now required to repay not only the interest on the debt but also part of the principal, while at the same time the contractual interest rate on the credit was increased. When the first debtor was finally unable to pay the debt, the bank issued a payment order and accelerated enforcement proceedings against the first debtor and the guarantors.
The key points for the successful outcome of the case were as follows:
- Careful examination of the documents provided by the bank for the issuance of the payment order. Because the payment order is issued without "hearing" the debtor's side, it is a strictly formal procedure in which the creditor's claim and its maturity must be evidenced by documents. The slightest formal deficiency in this procedure may lead to the payment order being invalid.
- A thorough study of the relevant case-law of the courts and the correct inclusion of the relevant facts in the legal provisions. According to the case-law, in cases where an additional act changes a credit agreement with a mutual account into an interest-bearing loan agreement, a renewal occurs, i.e. the obligation under the credit agreement is abolished and a new obligation under the loan agreement is created. In such cases, the collateral (e.g. a mortgage or guarantee) is also written off, provided that it has not been reissued. It is crucial to establish the facts of the case in order to determine whether the change in this particular case is indeed so substantial as to justify the extinguishment of the original debt and the creation of a new one.
- A summary of the facts which could justify such a significant change in the contract in question as to justify the assertion that there was in fact an extinguishment of the obligation by the creation of a new one. The meticulous study of the movements of the accounts, which showed that the amount of the loan had paid off the balance of the credit, and the knowledge of economic parameters that argued for the further burdening of the original debtor precisely because of the change of the credit into an interest-bearing loan, but also because of the further interest burden, led to two judicial judgments on the extinction of the guarantors' liability.
The individuals were required to give three court appearances. The first court battle concerned the application for a stay of execution of the payment order. The Court of First Instance accepted that the second additional act established an interest-bearing loan agreement between the original debtor and the credit institution, from the proceeds of which the balance of the current account was paid off, thereby extinguishing the liability of the guarantors, who had provided their guarantee only in the original credit agreement. In particular, the judgment accepted, inter alia: 'By a subsequent agreement, legally executed inadvertently on [...], the creditor financed the creditor with a loan equal to the balance of the debt from the original credit agreement with an open (mutual) account, while at the same time opening credit agreement no. [...] account called 'DEBT account'. The amount of the loan disbursed was immediately credited to the current account held to service the original open account credit agreement, which was cancelled. The above loan, as stated above, was to be paid in one lump sum or in installments in sixty equal monthly installments, fixed in advance by time and amount. It follows from the foregoing that a new contract was concluded between the creditor and the defendant, a new debit loan agreement, repayable in equal installments, at a different (increased) interest rate, for which the loan account number [... ], and the proceeds of the disbursed loan were credited on the same day to the current account of the existing credit agreement between the parties with an open (current) account, which was cancelled. The above agreement is completely different from that of the current account, and the transactions under the revolving credit facility, by their nature, cannot be serviced by keeping an open account, since the entire debt is not due from the outset. [...] Consequently, since the open account credit agreement ceased to apply, the applicants were released from the guarantee agreement.
The court of first instance which heard the appeal against the payment order made the same assumption. On the other hand, the court of appeal did not accept that ground, but proceeded to annul the payment order, accepting a formal ground, namely that the bank had failed to produce the entire account transactions of the account serving the credit agreement for the issuance of the payment order. The Court of Appeal held in particular that: "...it is clear that the full movements of the account are not shown from the date of the original contract on [...], but the first entries begin from [...] to [...] and then from [...] to [...]. Consequently, in accepting the relevant argument of the opponents, the whole of the account is not evidenced in writing, as it is clear that there are entries which are not included in it, although this is required, as stated in particular in the main part of this judgment, in order to issue a payment order based on a credit agreement for an open account.
The guarantor or principal against whom an order for payment is issued has several means of defence against his creditor. Particularly in the case of a payment order, precisely because of the strict formality of the procedure, there are often formal errors in the issuing of the order, which, if detected, can be exploited by the debtor to obtain its annulment. In the present case, the assumptions of the court of first instance concerning the extinction of the guarantee and the judgment of the court of appeal that the payment order was invalid ultimately discouraged the bank, which never came back to enforce its alleged claim against the guarantors.