Consequences of the Debtor’s Insolvency to the Guarantor in Latvia
When Guarantor is guaranteeing to be liable for the debt of a legal person, who can be, for example, legal persons or partnerships, or individual merchant and a person who performs permanent economic activities in Latvia although he is registered in a foreign country, to a creditor, he takes a risk that the debtor can go insolvent. If the guarantor would be released from his contractual duty just because of the insolvency of a legal person, it would be entirely against the aim of guarantee. Moreover, when principal debtor ceases to exist, guarantee becomes an independent obligation and creditors claim – independent claim. The Senate of Supreme Court of Republic of Latvia specified this in the case Nr.SKC-86/2011 of April 27th 2011.
From one prospective the aim of a guarantee is to ensure the performance of the principal debtor’s obligations, which gives the creditor the right to ask the performance of obligations from the guarantor in case the principal debtor does not perform his or her obligations. Although, a guarantee is an ancillary obligation that cannot exist without the principal obligation, an exception from the principle of guarantee accessority is acceptable if it contradicts with the aim of a guarantee.
Latvian Insolvency Law provides that at the end of the performance of the plan for extinguishing obligations by the principal debtor, the remaining obligations of this person shall be extinguished and execution proceedings for the recovery of the extinguished obligations shall be terminated. As the principal debtor usually covers only a small part of his or hers debt, such performance of the plan for extinguishing obligations cannot be considered as a ground for termination of the guarantee.
Furthermore, the Latvian Civil Law provides that a guarantee shall be terminated by any event or action that releases the principal debtor, however, the performance of the plan for extinguishing obligations cannot be considered as such event or action.
It is important to note that the agreement on guarantee between the creditor and the guarantor is a prerequisite for conclusion of the loan agreement between the creditor and the principal debtor. This view has also been supported by the Insolvency Administration.