The borrower has become insolvent - can I as guarantor proceed against him before paying?

Insolvency is one of the seven early-action grounds

Article 2071 opens by allowing the guarantor to move early: The guarantor, even before having paid, may proceed against the principal debtor in a list of defined situations. The debtor's insolvency is the second of them — the article names insolvency of the principal debtor as a ground on its own. The rationale is plain. A guarantor's ultimate protection is his right, after paying, to recover from the debtor; if the debtor is insolvent, that right may be worthless by the time the guarantor is called on. So the law lets him act while there may still be something to protect.

Actual and imminent insolvency both count

The article covers both the disease and its onset. The insolvency of the principal debtor addresses insolvency that has arrived. A further ground reaches back earlier, allowing action If the principal debtor is in imminent danger of becoming insolvent. A guarantor need not wait until the debtor is formally and hopelessly insolvent before stirring; a credible, impending collapse of the debtor's finances is enough. This matters because value drains away in the approach to insolvency, and a guarantor who could act only after the fact would often find nothing left. The two grounds together let him respond to the risk as it develops, not merely once it has crystallised.

The action is for protection, not payment

As with every ground in the article, the object of the action is defensive. The provision states that the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor. The guarantor is not paying the creditor and then chasing the debtor for reimbursement — he has not paid. Nor is he compelling the debtor to pay the creditor. He is seeking to be released, or to be given security that will shield him from both the creditor's future demand and the debtor's failing finances. The relief matches the danger.

Practical steps

In practice, invoking this requires showing the debtor's insolvency, or the imminent danger of it, with something more than suspicion — the debtor's inability to meet maturing obligations, seized or dissipating assets, or the like. The remedy is pursued in court, and what it yields is release from the guaranty or an order for protective security, so a guarantor watching a borrower's finances deteriorate is not confined to waiting for the creditor's demand. Documenting the debtor's financial state as it worsens is therefore useful, because that evidence is what supports acting early under the article rather than after the loss is complete.

Cases citing this provision

These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.

• Autocorp Group, et al. vs. Intra Strata Assurance Corp, et al, G.R. No. 166662, June 27, 2008 — read the decision on LawPhil →
• Special Steel Products, Inc. vs. Lutgardo Villareal, et al, G.R. No. 143304, July 8, 2004 — read the decision on LawPhil →
• Rizal Commercial Banking Corporation vs. Teodoro G. Bernardino, G.R. No. 183947, September 21, 2016 — read the decision on LawPhil →

Related provisions

• Civil Code, Article 2071 — Guarantor's Action Before Paying