Business surety and self-debtor surety

Surety (kaution) is one of the oldest financial instruments in business. When a company takes out a loan, rents premises or enters into a supplier agreement, the creditor can require that a third party, the surety, guarantees performance. For many companies, surety is necessary to get started or to grow.

But surety involves a real risk: if the debtor does not pay, the creditor can direct the claim at the surety. It is essential to understand precisely what you are promising when you sign a surety declaration.

What is surety?

Surety is an agreement where the surety undertakes to the creditor to fulfil the debtor's obligation if the debtor does not. It is thus a form of guarantee or security.

In business relationships, surety is used, among other things, for:

• Business loans and credit facilities, where the bank requires the company or its owners to stand surety for the loan
• Commercial leases, where the landlord requires a surety from a parent company or a bank
• Supplier credits, where the supplier requires surety from a parent company for a subsidiary's payments
• Contractual obligations, where a party requires a third party to stand surety for the contracting party's performance

Simple surety and self-debtor surety

The most important distinction in surety law is the difference between simple surety and self-debtor surety.

Simple surety

With simple surety, the creditor cannot require the surety to pay before the creditor has sought satisfaction from the debtor and established that the debtor cannot pay (subsidiary liability).

• The creditor must as a rule attempt recovery from the debtor first
• The surety is only liable for the amount that cannot be recovered from the debtor

Self-debtor surety

With self-debtor surety, the creditor can require the surety to pay at once, without having attempted recovery from the debtor (primary liability).

• The creditor can freely choose to go directly to the surety
• The surety is liable as the debtor themselves
• Self-debtor surety is far more burdensome for the surety

In practice, banks, landlords and large suppliers almost always require self-debtor surety. Simple surety is rarely accepted in business relationships.

Who stands surety?

In business relationships, sureties are typically:

• A parent company standing surety for a subsidiary's obligations
• Personal surety from the owner, where a sole shareholder or majority owner stands surety personally for the company's loan, which is very common in smaller companies
• A bank issuing a guarantee on the customer's behalf (see below)
• An insurance company offering surety insurance

Personal surety: major risks for owners

Many entrepreneurs and owners are not aware of the consequences of personal surety. If you stand surety personally for your company's loan:

• You are liable with your entire personal wealth, including your house, car and savings
• A bankruptcy in the company can lead to personal debt settlement
• Your spouse can be affected, depending on your property arrangements

Always negotiate to limit the surety amount to a specific maximum, and avoid unlimited surety if possible.

Bank guarantee and surety declaration

Bank guarantee: a bank issues a written declaration that it will pay up to a certain amount if the customer does not fulfil their obligation. Bank guarantees are precisely defined and are typically used in trade and construction.

Surety declaration: a natural or legal person, other than a bank, promises to be liable for another's obligation. The surety declaration is typically broader and can cover several obligations under an agreement.

What should a surety declaration contain?

1. The parties' identification

• The surety: full legal name, CVR number (for companies) and address
• The creditor: who the surety declaration is given to
• The debtor: the party whose obligation is being guaranteed

2. A description of the obligation

A precise description of what is being guaranteed:

• A specific agreement or contract (reference to the agreement ID and date)
• All obligations from a given debtor towards the creditor
• A specific transaction, for example a particular loan

Avoid unclear wording such as "all existing and future obligations". Set clear limits.

3. The type of surety: simple or self-debtor

State explicitly whether the surety is simple or self-debtor surety:

The Surety is liable as self-debtor, so that the Creditor is at
any time entitled to demand payment directly from the Surety
without prior legal proceedings against the Debtor.

4. Maximum amount

State a specific maximum amount for the surety obligation. An unlimited surety can in principle cover all the debtor's current and future obligations.

The Surety's liability under this surety declaration is
limited to DKK [X] including interest and costs.

5. Duration

State the surety's term:

• Fixed-term: "The surety applies until [date] inclusive"
• Ongoing: "The surety applies until it is terminated in writing with X months' notice"
• Linked to a specific obligation: "The surety lapses when [loan X] is fully repaid"

6. Subsidiary liability (for simple surety)

State the conditions for when the surety can be called on:

The Creditor is not entitled to call on the Surety
unless the Creditor has first carried out unsuccessful
recovery from the Debtor.

7. Duty to notify

The creditor should have a duty to notify the surety of:

• The debtor's default
• Changes to the underlying agreement that can increase the surety risk
• Notice of a claim against the surety

8. Recourse

The surety typically has a right of recourse against the debtor, that is, the right to demand the paid amount back from the debtor if the surety has paid in the debtor's place.

9. Choice of law and disputes

State that Danish law applies and at which court disputes are handled.

Business surety: special considerations for limited companies

If an ApS or A/S provides security or surety for a shareholder's or a management member's obligation, this is a shareholder loan (kapitalejerlån) under the Companies Act. The legal position here has changed:

• The special company-law conditions for shareholder loans (including that the assistance had to fit within the free reserves, be decided by the general meeting and only after the first annual report) were repealed as of 1 January 2025. A company can therefore as a rule lawfully provide security or surety for a shareholder without these conditions being met.
• Management must, however, still ensure that the disposition is sound in relation to the company's capital resources, is on commercial terms and is in the company's interest. The rules on self-financing also still apply.
• The tax rules are unchanged: a shareholder loan to a natural-person shareholder is still taxed as dividend or salary under section 16 E of the Assessment Act, if it is not made as part of a normal commercial transaction. So even though it has become easier under company law, there can be significant tax consequences.

For surety in favour of group companies, the terms should be set on arm's-length conditions, and larger sureties should be approved by the company's management.

Terminating a surety declaration

A surety can typically be terminated with notice, if agreed. Termination does not, however, cut off the surety's liability for obligations that arose before the termination.

Conclusion

Surety is an effective but risky instrument. Before you sign a surety declaration, you should be able to answer three questions clearly: What is the maximum amount I may have to pay? When can the claim be directed at me? When does the surety end? If you cannot answer all three clearly, the surety declaration is worded too broadly. Seek legal advice for personal surety for larger amounts.

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Surety is a complex legal area. This article is for guidance only and does not constitute legal advice. Seek legal advice for personal surety for larger amounts.