Guarantee

Definition and legal basis

A surety is a unilaterally binding contract in accordance with Section 765 of the German Civil Code (BGB), by which a guarantor undertakes to a creditor to vouch for the debts of a third party. The guarantor assumes responsibility for fulfilling the obligations of the principal debtor if the latter fails to meet its payment obligations. The surety primarily serves as a security instrument for creditors, particularly in the case of credit transactions. It is accessory, i.e. its existence is directly linked to the principal obligation. The guarantee declaration is generally subject to the written form requirement in accordance with Section 766 BGB. The guarantor is liable to the creditor on a subsidiary basis, which means that enforcement must first take place against the principal debtor.

Types and forms of guarantee

There are various forms of guarantee with different legal implications. The time guarantee is limited in time and expires after an agreed period. The counter-guarantee secures the guarantor’s right of recourse against the principal debtor. Subsequent guarantees are used if a principal guarantor is unable to pay. Credit institutions often use global guarantees that cover various claims of a debtor. The guarantee can relate to existing, but also to future or conditional liabilities. It is important to differentiate this from a joint and several guarantee, where the party joining the guarantee is jointly and severally liable with the principal debtor.

Guarantee for investments and start-ups

Guarantees are a complex financing instrument for start-ups and investors. Young companies often use guarantees to demonstrate creditworthiness or to overcome financing hurdles. Investors can use guarantees as a security instrument to minimize risks associated with loans or shareholder loans. Special care should be taken with guarantees from founders or shareholders, as they may be personally liable. Start-ups should carefully examine the legal consequences and seek legal advice if necessary. Venture capital companies use guarantees as an instrument to minimize risk in financing rounds.

Legal risks and protective measures

The assumption of a guarantee entails considerable personal risks. The guarantor is liable for the liabilities of the principal debtor with all his assets. Particular caution is required with global guarantees that are not limited to a maximum amount. Case law and legislators have developed protective measures for guarantors, particularly in the case of consumer guarantees. The immorality of guarantees can be assumed if the guarantor is economically overburdened or does not pursue his own economic interests. Start-ups and investors should check the guarantee declaration carefully and assess possible liability risks in advance.

Guarantee in corporate practice

In business practice, guarantees are an important instrument for securing loans. Credit institutions often require guarantees from shareholders or managing directors for corporate financing. For start-ups, a guarantee can facilitate access to outside capital, but also entails considerable personal risks. The guarantee can relate to loans, leasing agreements or other liabilities. Companies should carefully examine the tax and legal implications. The guarantee can serve as an instrument of corporate financing, but requires a careful legal and economic assessment.