Amendment Blocks Unlimited Revolving Guarantees by Individuals - International Law Office

Background
Validity of Guarantee Agreements
Provision Against Revolving Guarantees by Individuals in Relation to Loans

Background

In December 2004 an amendment to the Civil Code, effective as of April 1 2005 (Law 147/2004), altered the system of revolving guarantees. A revolving guarantee (ne-hosho) can be described as a guarantee of unspecified obligations arising under an ongoing transaction or transactions between a creditor and a primary debtor. Revolving guarantees are often classified as either limited revolving guarantees or unlimited revolving guarantees. A limited revolving guarantee (gentei ne-hosho) is described as a revolving guarantee which specifies either the maximum limit of the guarantee or the term of the guarantee, or both. An unlimited revolving guarantee (houkatsu ne-hosho) does not give such specifications.(1) Therefore, the guarantor can often incur liabilities well in excess of what was originally expected. Before the amendment, no specific provision on any type of revolving guarantee existed. However, in practice, unlimited revolving guarantees which neither specified a maximum limit to the guarantee nor set out a specific term of the guarantee were often provided. The amended code now specifically refers to revolving guarantee agreements in relation to loans. In particular, it precludes individuals from making unlimited revolving guarantees in relation to loan obligations. This was introduced in order to protect individual guarantors from the dangers associated with providing such guarantees.(2)

Validity of Guarantee Agreements

Any guarantee agreement - whether concerning revolving guarantees or guarantees of specified claims - is invalid unless concluded in writing.(3)

Provision Against Revolving Guarantees by Individuals in Relation to Loans

A revolving guarantee agreement is defined as a 'revolving guarantee agreement in relation to loans' (kashikin-to ne-hosho keiyaku) where it fulfils the following conditions:(4)

• It is an agreement to provide a revolving guarantee;(5)
  
  
• Loan obligations(6) are included within the scope of the primary obligation; and
  
  
• An individual is guarantor.

Such revolving guarantee agreements are treated as follows:

• With regards to the maximum amount, a revolving guarantee agreement is invalid unless the principal of the primary obligation, together with the interest and damages of the primary obligation, and the compensation for damages accrued due to non-performance of the guarantee obligation, are set out in the agreement.(7) In other words, the maximum amount depends not only on the principal of the primary obligation, but also on the maximum amount of the guarantor's responsibilities under the agreement.
  
  
• If the date on which the principal of the primary obligation is to be fixed(8) is not within five years of the conclusion of the agreement, such provision is invalid - even if the agreement itself is not. In this case (or if the date is not specified at all in the agreement), the principal will become fixed after three years from the date of conclusion of the agreement. The same rule applies if the date for fixing the principal is amended.(9)
  
  
• The principal may be fixed before the agreed date in the following cases:
  
  
  • The obligee applies for involuntary execution or exercise of a security interest for money claims against assets of the primary obligor or guarantor;
    
    
  • A determination has been made for commencement of bankruptcy procedures in relation to the primary obligor or guarantor; or
    
    
  • The primary obligor or guarantor dies.(10)

For further information on this topic please contact Hiroo Atsumi at ATSUMI & Partners by telephone (+81 3 5501 2111) or by fax (+81 3 5501 2211) or by email (h.atsumi@apap.gr.jp).

Endnotes

(1) For further information on revolving guarantees prior to this amendment please see Kinyu Jitsumu Daijiten, published by Kinyu Zaisei Jijo Kenkyukai (2005), and Ginko Madoguchi no Homu Taisaku 2800-ko, Part II, published by Kinyu Zaisei Jijo Kenkyukai (1998).

(2) For further information on the latest amendment please see Kinyu Homu Jijo No 1735 "New Guarantee System and Financial Practice", pages 10 to 31, No 1736 "New Guarantee System and Financial Practice", pages 20 to 33, and No 1738 "Civil Code Amendment of 2004", pages 41 to 51.

(3) See Article 446, Paragraph 2 of the amended code.

(4) See Article 465-2, Paragraph 1 of the amended code.

(5) A 'revolving guarantee agreement' is defined in Article 465-2, Paragraph 1 of the amended code as a guarantee agreement for securing, as the primary obligation, unspecified claims within a certain scope.

(6) That is, obligations incurred by lending money or discounting notes; in other words, with regard to the former, a repayment obligation under a loan agreement.

(7) See Article 465-2, Paragraphs 2 and 3 of the amended code.

(8) 'Ganpon kakutei kijitsu', as defined in the amended code.

(9) See Article 465-3 of the amended code.

(10) See Article 465-4 of the amended code.