I Only Signed as a Guarantor. Can the Bank Proceed Against Me?
This is one of the most common questions asked by guarantors after receiving a notice from a bank.
Many people agree to become guarantors for:
* Family members.
* Friends.
* Business associates.
* Companies in which they are directors or partners.
Years later, when the borrower defaults, the guarantor receives a notice from the bank and discovers that the liability may be much more serious than expected.
Understanding the rights and obligations of a guarantor is therefore essential.
Who Is a Guarantor?
A guarantor is a person who agrees to be responsible for repayment of a debt if the principal borrower fails to repay it.
In banking transactions, guarantors frequently include:
* Family members.
* Directors of companies.
* Partners of firms.
* Friends or associates of the borrower.
The guarantee may be:
* Personal.
* Corporate.
* Supported by mortgage or other security.
Can the Bank Proceed Directly Against a Guarantor?
In many cases, yes.
One of the biggest misconceptions among guarantors is:
“The bank must first recover the money from the borrower.”
This is generally incorrect.
Under Indian law, the liability of the guarantor is ordinarily co-extensive with that of the principal borrower unless the contract provides otherwise.
Consequently, banks frequently proceed simultaneously against:
* Borrowers.
* Guarantors.
* Corporate guarantors.
Can SARFAESI Proceedings Be Initiated Against a Guarantor?
Yes.
If a guarantor has:
* Mortgaged property,
* Created security interest, or
* Offered secured assets,
the bank may initiate SARFAESI proceedings against such secured assets.
The fact that the guarantor did not personally borrow the money does not automatically prevent enforcement of the security.
Can the Guarantor’s House Be Auctioned?
If the guarantor has validly created a mortgage or security interest in favour of the bank, the secured property may become subject to SARFAESI proceedings.
This often comes as a surprise to guarantors who believed that only the borrower’s assets were at risk.
What Notices Does a Guarantor Normally Receive?
Depending upon the circumstances, a guarantor may receive:
1.Section 13(2) Notice
Demand notice requiring discharge of the liability.
2.Possession Notice Under Section 13(4)
Where the bank proceeds against secured assets.
3. Section 14 Proceedings
Where physical possession is sought.
- Auction Notice
Where the secured property is proposed to be sold.
- DRT Summons
Where the bank has filed proceedings before the Debt Recovery Tribunal.
Does the Guarantor Have a Right to Challenge SARFAESI Proceedings?
Yes.
A guarantor affected by SARFAESI measures may have remedies under law.
Depending upon the facts of the case, issues may arise regarding:
* Validity of notices.
* Amount claimed.
* Security documents.
* Procedural compliance.
* Conduct of auction proceedings.
Each case depends upon its own facts and documents.
Can a Guarantor File Proceedings Before the DRT?
Yes.
A guarantor who is aggrieved by SARFAESI measures may approach the Debt Recovery Tribunal in appropriate cases.
For example, where:
* Possession proceedings are initiated.
* Auction proceedings are commenced.
* Secured assets are sought to be sold.
The available remedies depend upon the stage of the proceedings and the facts involved.
What If the Bank Files a DRT Case?
Guarantors are frequently made defendants in Original Applications filed before the Debt Recovery Tribunal.
Many guarantors are surprised to discover that the bank seeks a Recovery Certificate not only against the borrower but also against the guarantor.
Receiving a DRT summons should therefore never be ignored.
Can SARFAESI Proceedings and DRT Proceedings Continue Simultaneously?
Yes.
This is one of the most misunderstood aspects of banking litigation.
A bank may simultaneously:
Initiate SARFAESI Proceedings
Against secured assets.
and
File an Original Application Before DRT
Against the borrower and guarantors.
Accordingly, the existence of one proceeding does not necessarily stop the other.
Common Defences Raised by Guarantors
The available defences vary from case to case.
Issues that commonly arise include:
1.Limitation
Whether the claim is legally enforceable within the prescribed period.
2.Extent of Liability
The precise scope of the guarantee.
3.Documentation Issues
Questions relating to execution and validity of documents.
4.Accounting Disputes
Disputes regarding the amount claimed by the bank.
5.Procedural Violations
Issues concerning statutory compliance in SARFAESI proceedings.
Common Mistakes Made by Guarantors
i.Assuming the Matter Concerns Only the Borrower
Guarantors are often directly exposed to recovery proceedings.
ii.Ignoring Notices
Whether it is a Section 13(2) notice, DRT summons, possession notice or auction notice, ignoring the communication can seriously affect available remedies.
iii. Depending Solely on Verbal Assurances
Informal discussions do not automatically suspend legal proceedings.
iv.Seeking Advice Too Late
Many guarantors approach legal professionals only after possession or auction proceedings have advanced significantly.
Can a Guarantor Recover Money From the Borrower?
In certain circumstances, after making payment under the guarantee, a guarantor may have rights against the principal borrower.
The precise nature of such rights depends upon the facts, the guarantee agreement and applicable law.
What Happens If the Bank Obtains a Recovery Certificate?
If the Debt Recovery Tribunal issues a Recovery Certificate, recovery proceedings may be initiated through the Recovery Officer.
Depending upon the circumstances, recovery measures may include:
* Attachment of property.
* Garnishee proceedings.
* Attachment of bank accounts.
* Sale of assets.
* Other recovery measures permitted by law.
Conclusion
A guarantor should not assume that signing a guarantee is merely a formality. Under Indian banking law, guarantors may face substantial legal consequences when the principal borrower defaults.
At the same time, guarantors possess important legal rights and remedies. Understanding the nature of the guarantee, reviewing notices carefully, and responding promptly to legal proceedings are often crucial in protecting those rights.
Whether the issue involves SARFAESI proceedings, DRT litigation, possession proceedings, auction notices, or recovery actions, a guarantor should carefully evaluate the legal and factual position before deciding on the appropriate course of action.
Disclaimer: This article is intended for general informational purposes only and does not constitute legal advice. Every case depends upon its own facts, documents and circumstances.