In a recent case (T 5911-15) the Supreme Court clarified how to interpret joint and several liability when the creditor settles with one of the debtors and simultaneously releases that party from any future claims.
According to the Promissory Notes Act, and unless otherwise agreed, joint and several liability to repay a loan is the general rule in a joint loan with two or more debtors. Accordingly, the creditor may require the whole loan amount (or part of it) to be repaid by one of the debtors. The paying debtor will then have a right of subrogation towards the other debtor in relation to the pro rata share of the loan of the co-debtor or debtors. The anticipated outcome is that the debtors will have repaid their share of the loan, but as the creditor has the ability to claim the repayment of any of the debtors, the creditor can claim repayment from the most solvent debtor. However, this does not mean that the creditor can claim repayment under any circumstances. The referred case clarifies one important restriction.
A loan of Skr300,000 in total was granted jointly to two debtors. Nothing was agreed between the debtors in relation to the liability for repayment and hence the debtors were jointly and severally liable for the repayment. The debtors repaid parts of the loan but eventually ended up in default, as they did not pay the agreed amortisation and interest. The residual amount of the loan was Skr171,000. The creditor then settled on an amount with one of the debtors (Debtor 1) to be repaid without the consent or knowledge of the other debtor (Debtor 2). The creditor asserted that the settlement did not entail a final settlement of the loan, although the creditor assured Debtor 1 that the creditor would not claim any further amount under the loan from Debtor 1. The creditor and Debtor 1 settled on Skr100,000. Based on this, the court found that it was the only payment Debtor 1 had made during the loan term. The creditor claimed the residual amount of Skr71,000 (excluding accrued interest and amortisation) under the loan from Debtor 2.
The lower court and the appellate court concluded that the debtors were jointly and severally liable for the loan and hence that Debtor 2 was liable to pay the residual amount under the loan. However, the Supreme Court was of a different opinion. The Supreme Court concluded that the foundation of a joint and several liability between debtors is that the debtor that repays more than its pro rata share of a loan has a right to recover and claim the exceeding amount from the other debtor or debtors. The creditor is therefore obliged to ascertain that the right of recourse is not lost. The court held that a debtor's right of recourse will be lost, as a settling debtor will be considered debt free if its share of the loan is waived by the creditor and the creditor confirms that it will not be held liable to any residual amount under the loan. If a creditor waives its claim against a debtor, without the other debtor's consent, the creditor cannot claim for any exceeding amount from the other debtors under the joint and several liability for the debtor's share of the loan that has been waived. In other words, if a creditor waives any debtor's share, the remaining debtor is liable only for its own pro rata share of the residual amount of the loan, which in this case was Skr21,000. Consequently, the creditor lost Skr50,000 of repayments under the loan because of the settlement with one of the debtors.
This case clarifies that a creditor has a responsibility to consider the debtors' rights of recourse against one another. It should be taken into account in relation to settlement negotiations when more than one debtor is involved.
For further information on this topic please contact Fredrik Ljungström or Sara Göthlin at Advokatfirman Törngren Magnell KB by telephone (+46 8 400 283 00) or email (firstname.lastname@example.org or email@example.com). The Törngren Magnell website can be accessed at www.torngrenmagnell.com.
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