Exercise caution before doing so, as you might end up paying the sum if the borrower turns out to be a defaulter

If we stand as a guarantor for someone’s loan, be it a home, education or personal loan, it means that we agree to repay the person’s debt in case of default. According to most loan contracts, the liabilities of a guarantor are similar to that of a borrower, implying that we are equally responsible for paying off the loan. The Credit Information Bureau India Ltd (CIBIL), which assesses borrowers’ repayment capacity, has said that guarantors’ credit-worthiness would be directly hit if the borrower defaults or even if he repeatedly delays in repaying the monthly instalments. Section 128 of the Indian Contract Act, 1872 speaks about surety’s liability and states that the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.

There are many judicial pronouncements too that have established the crucial role of the guarantor. The guarantor of a loan is liable to pay it if the debtor fails to clear it, the Supreme Court held, in an appeal filed by one Ganga Kishun who had stood as a surety to a bank loan taken by Ganga Prasad, who died before settling it. Ganga Kishun had approached the Supreme Court against the Uttar Pradesh Government’s decision to recover the loan arrears from him after the death of the principal debtor. The Supreme Court observed that the creditor has a right to obtain a decree against the surety and the principal debtor and the surety has no right to restrain execution of the decree against him until the creditor has exhausted his remedy against the principal debtor for the reason that it is the business of the surety/guarantor to see whether the principal debtor has paid or not.

Recently, there was a similar case that came up before the National Commission. The complainant, Kusum Kalra had deposited a sum of Rs.70,000 with State Bank of Patiala. The FDR was due for repayment. However, the bank refused to credit the amount to her savings account saying that she had stood as a guarantor in the loan account of one Tejinder Kaur and the said account had become a Non-Performing Asset (NPA). The complainant, however, contended that it was illegal and unjustified action on the part of the bank to recover her deposit and sent a legal notice demanding that payment of FDR be made, but in vain. Then, the complainant filed a complaint before the District Forum. The bank filed a reply stating that the complainant stood guarantor for Tejinder Kaur who failed to repay the loan amount and hence the amount was rightly recovered from Ms. Kalra after giving due notice to her and, therefore, there was no deficiency on their part. The District Forum, after taking into account the evidence of the parties, dismissed the complaint.

An appeal was filed before the State Commission, which set aside the order of the District Forum. It held that there was no evidence that Ms. Kalra had stood as guarantor for Ms. Kaur against the loan and that the promissory note was endorsed by Ms. Kaur in favour of Ms. Kalra and further endorsement of the same on behalf of her in favour of the bank was without consideration and such promissory note without consideration is void. “Instructions of the bank to the contrary that if a promissory note is executed by the borrower in favour of the guarantor then the guarantor endorses the same in favour of the bank then it would be a valid document cannot be taken into account as it is not supported by legal provision”, it said and directed the bank to credit the amount of FDR in the complainant’s savings account along with interest and also allowed litigation cost of Rs.10,000.

Against this, the bank preferred an appeal before the National Commission. The National Commission after hearing the parties and looking into the merits of the case held that whether the guarantee deed or agreement on the prescribed proforma was executed or not, the record of the case and the endorsement on the promissory note clearly proved that the complainant was a guarantor of the loanee Tejinder Kaur, who had defaulted on repayment. The liability of a guarantor and the principal debtor are co-extensive and, therefore, the bank was justified in appropriating the amount from the account of the guarantor to satisfy the outstanding loan, it said and thus upheld the decision of the District Forum.

Thus, one needs to be very cautious and know the rules before signing as a guarantor.

The writer works with CAG, which offers free advice on consumer complaints to its members. For membership details/queries contact 24914358/24460387 or helpdesk@cag.org.in