Developers undertook to repay a debt of a company that had taken financing from the bank. A debt arrangement was signed between the bank and the company, under which it was determined that the bank must realize the collateral it has, that if they are not enough to repay the entire debt, the debt will be repaid from apartments in the project and only after that must the developers pay the remaining debt, if any.
The court ruled that the obligation is an indemnity and therefore the fact that the debt was reduced does not mean that their obligation will also be reduced. When an obligation is a guarantee, the provisions of the law will apply to it, including the fact that the debtor’s obligation is reduced, the guarantor’s obligation will also be reduced, while indemnity is an independent obligation that is disconnected from the relationship between the debtor and the creditor. The distinction is made based on the degree of independence of the obligation, the date the obligation comes into effect, and the content of the obligation. Here, it is an independent obligation that the developers assumed independently of the bank’s granting of the loan. In terms of the date of the obligation, it was created after the debt settlement. In terms of the content of the obligation, the entrepreneurs did not undertake to pay the remaining debt, but to compensate the bank for the remaining debt balance, after the conditions set out in the debt settlement have been met. Therefore, it is an indemnity and not a guarantee, and the entrepreneurs must pay the full amount they committed to.
Published in Legal Channel 433 19.02.2025 Afik & Co. https://he.afiklaw.com//
