By David G. Enang Esq. MICIArb, AICMC
In Nigeria’s business and financial landscape, guarantorship is often trivialized and treated as a casual favour. “Just sign here to help your friend secure that loan.” or “Just sign to help your friend secure the employment opportunity. ” Yet, the legal perception of guarantorship is far from casual. It creates a weighty, enforceable obligation with serious financial and legal consequences.
As a lawyer and non-executive director in Companies, I have witnessed countless well-meaning individuals thrown into distressing financial and legal disputes simply because they failed to understand the full extent of guarantorship. This writeup seeks to enlighten readers on the topic of guarantorship in Nigeria.
WHAT IS GUARANTORSHIP?
Guarantorship is a legally binding commitment, where a person (called the Guarantor) agrees to take full responsibility for someone else’s debt or obligation in the event of default. In ROYAL EXCHANGE ASSURANCE (NIG) LTD & ORS v. ASWANI TEXTILE INDUSTRIES LTD (1992) LPELR-2960(SC), the Supreme Court held that a guarantee is a written undertaking made by one person to a second person to be responsible if a third person fails to perform a certain duty, e.g. pay a debt.
In the eyes of the law, once you sign a guarantor form or a contract for guarantee, you are no longer just a friend, you are now seen as a “Secondary debtor”. This position is not an exaggeration but an apparent reality with judicial recognition. In the case of MOHAMMED v. NDIC (2024) LPELR-62524(SC), the Supreme Court held that a guarantor is technically a debtor.
LEGAL EFFECTS OF BEING A GUARANTOR
After you have agreed to stand as a Guarantor, what does it really mean, in line with Nigerian laws?
- Where the person you stand as a guarantor for, fails to pay a loan sum, the creditor has the legal right to immediately come after you to recover the loan sum without having to pursue the principal debtor. This position has been affirmed by the Supreme Court in the case of AUTO IMPORT EXPORT v. ADEBAYO & ORS (2005) LPELR-642(SC) Recall, that once you become a guarantor, you are seen as a “Secondary debtor” in the eyes of the law.
- Your assets are automatically up for grabs. What this entails is that, a creditor to whom you now owe (as a result of standing as a guarantor) can immediately approach the courts and have your landed properties, cars, shares or anything of value belonging to you, attached, liquidated and used to satisfy or recover the pending debt or obligation.
- You are not entitled to be notified of defaults. Most guarantees are structured so that the Creditor is not obligated to inform you when the debtor defaults. You will only hear from the Creditor when it’s time to pay. Most Creditors will not be patient in enforcing their rights to your assets. This typically puts a Guarantor in unplanned and unfavorable financial positions.
- Your creditworthiness will be affected. Drawing from my professional experience in loan syndication and issuance of credit facilities and grants for businesses, an individual who is known to have signed as a guarantor in several transactions, is typically seen as an unreliable or questionable business partner. This is because such a person is threading on thin ice. Their finances and assets are safe, only to the extent of the principal debtor’s ability to meet their obligations.
WHAT YOU SHOULD DO TO ENSURE A SAFE GUARANTORSHIP
- Ask for the full loan agreement between the Creditor and the person you’re standing as a guarantor for. If it is guarantorship for employment, ask for the employment contract and understand the obligations and extent of your liability.
- Understand the duration and scope of the guarantee. This will give you a clear picture of what you’re getting into, how long you would be expected to stand as a guarantor and the possible actions the Creditor may take against you.
- Insist on a written indemnity from the Principal debtor. The importance of this indemnity, is to ensure that where a Creditor has recovered debts from you as a guarantor, you have a document you can easily lay reliance on to claim or recover the debts or loses from the person you stood as a guarantor for.
- Consult a lawyer.
ARREST OF A GUARANTOR BY THE POLICE
Guarantorship is a transaction of a civil nature. It is given life through the execution and existence of a valid and binding contract. Therefore, where a person defaults in their obligations, the appropriate medium for remedy is the Court. The Creditor is expected to approach the Court to enforce the contract of guarantorship.
The Nigeria Police Force has no duty in meddling in contractual affairs. A guarantor only came into the picture through the execution of a contract. Signing a guarantorship contract is not a criminal offense, but yet we find the Nigeria Police Force arresting guarantors in a bid to enforce a guarantorship contract or ensure repayment of financial obligations. This practice is fundamentally wrong and not excusable in law. In the case of EZEIGBO v. IKECHUKWU & ORS (2019) LPELR-48445(CA), the Court of Appeal rightly held, that, “The police have no business helping parties to settle or recover debts.”
Additionally, the Police have no power to arrest a guarantor merely because the person whom they stand as guarantor for has defaulted in their obligations. The only exception to this is where there is a criminal offense or connection between the actions of a guarantor and the person he is guaranteeing.
REMEDIES AVAILABLE TO A GUARANTOR
The remedies available to a guarantor in a duly executed contract of guarantee are typically very slim.
- In a civil transaction where a principal debtor fails to repay a debt, the defense available to a guarantor is that the principal debtor has already paid the debt (perhaps, not to the knowledge of the Creditor).
- Where a guarantor is able to show that he did not sign the contract at all or he was mislead to sign as a guarantor.
- In the event that a guarantor is arrested by the Police, the guarantor has the right to file a Fundamental Right action against the Police and the Creditor in court for damages.
CONCLUSION
Guarantorship is not just a signature, it is a commitment with severe legal consequences. Be generous and kind, but be cautious. Your good name and financial future deserve protection.
David G. Enang Esq. MICIArb, AICMC is a Legal Practitioner, Construction Industry Arbitrator and an Associate in the Real Estate, Construction and Infrastructure Law Practice Group at Law Corridor