Personal or business suretyship?

A recent case before the Amsterdam Court of Appeal concerns the question of whether a personal or a business contract of suretyship was concluded. Procedural-law lawyer Lennard Noordzij explains.

Facts of the case

Geldvoorelkaar operates a crowdfunding platform. With its website, it brings together parties who want to borrow money from and lend money to each other. Via Geldvoorelkaar, the enterprise Hal 24 enters into a loan agreement The agreement that one party allows a third party to use an item without financial consideration under the condition that that party will return the item.
» Meer over loan agreement loan agreement with private investors for an amount of € 92,400, for the purchase of furniture and equipment. The agreement is entered into for a period of five years and at an interest of 8.5% per year. The director and major shareholder of Hal 24 also signs the loan agreement, in the capacity of a ‘co-borrower’. Hal 24 does not repay the loan, and Geldvoorelkaar therefore calls in the outstanding debt early. As Hal 24 is being liquidated and therefore does not provide any opportunity for recovery, Geldvoorelkaar turns to the director and major shareholder. He puts up a defence that there is a personal and not a business suretyship.

Special duty of care

When granting credit to small and medium-sized enterprises, banks often require that the director and major shareholder stands surety for the obligations of his enterprise under the credit. This requirement was also set by Geldvoorelkaar. The difference between a personal suretyship and a business suretyship is important, because professional money lenders have a special duty of care in respect of personal sureties.

The Supreme Court of the Netherlands has ruled that the personal surety may annul a contract of suretyship if he misjudged the risks when entering into the surety agreement and would not have concluded the agreement if he had made a correct assessment of that risk. Even if the money lender (here: Geldvoorelkaar) cannot be blamed for contracting the surety when he was under the influence of an incorrect representation of affairs. The burden of proof that a personal surety has been sufficiently informed of the risks lies with the professional money lender.

Probably, Geldvoorelkaar had omitted to warn the director in this case. Therefore, the director attempted to contest his personal obligation to repay in this way.

Normal business operations?

In principle, suretyships provided by natural persons such as the director qualify as personal suretyships, unless it can be said that they have entered into such contracts of suretyship in the course of their profession or business. The director argues that there is personal suretyship, because (i) the purchase of furniture and equipment was not part of the normal business operations of Hal 24, (ii) the amount borrowed only covered part of the financing needs of Hal 24; and (iii) Geldvoorelkaar should understand that the director took an extraordinary risk with the loan.

Judgment of the District Court and the Court of Appeal

The District Court and the Court of Appeal take a different view. As the agreement concerns the purchase of furniture and equipment of Hal 24, it contributed to the core activity of Hal 24. The contract of suretyship has therefore been entered into for the normal business operations of Hal 24 and does not qualify as a personal suretyship. In addition, the Court of Appeal considers it important that the director had financial knowhow and had himself assisted by a consultant. The Court of Appeal therefore does not get around to the question of whether or not Geldvoorelkaar breached its special duty of care. The director is sentenced in person to payment of the € 92,400, plus the costs of the proceedings.