The dice is heavily loaded against a guarantor. As in the case of Gajendra Issar, who had to pay Rs 50,000 to a bank when his friend defaulted on debt payment. Luckily, there were two other guarantors who could cough up more; he took a smaller hit.
However, guarantors have rights. “If they are classified as a wilful defaulter as they had given a guarantee, they can approach the court seeking relief. They can argue that when they had given theguarantee, they did not know the borrower would default. Just because the borrower is mala fide does not mean the guarantor is, too,” says Ameet Hariani, managing partner of law firm Hariani and Co.
Additionally, a guarantor’s liability crystalises only when the guarantee is invoked by the lender. Typically, if a borrower can’t pay and is declared a defaulter, the guarantors are called upon to pay. If the guarantor can’t repay, only then is he labelled a defaulter. Hence, many feel the Reserve Bank of India’s recent clarification that individuals or corporate entities acting as guarantors to loans could also be identified as ‘wilful defaulters’ for refusing to clear dues is a tough one. “Labelling guarantors as defaulters sounds a bit excessive,” says Anil Harish, partner of law firm DM Harish and Company.
Of course, there could be circumstances in which the guarantor cannot pay and still argue their case strongly. For example, those who run a business and have their funds/assets tied for this purpose can say they have no assets to offer. Similarly, those with mortgaged or under-construction properties have assets but since it is still not fully paid for, they can fight their case because they really don’t still own the asset.
These are all legal options for guarantors. The lender, however, can very much do anything and at any time. For example, the guarantee document has clauses which allow the lender to invoke it at any point.
“Usually, guarantees say a lender can invoke it anytime during the process of recovery of dues from the borrower. That is, a lender need not necessarily exhaust all options to recover the dues from the borrower before knocking at the guarantor’s door. Also, as per law, a lender can sue a guarantor if the borrower defaults,” says V N Kulkarni of debt-counselling centre Abhay.
Still, though the lender can come calling at any time, the guarantor can say the borrower has the means to pay and so the lender should come to him later, says Harish.
But the fear of being called a defaulter force many to pay up meekly. “I was close to retirement and had a daughter to marry off. Though it pinched that time when I had to give up all the liquid cash, I still went ahead for the fear of being called a defaulter,” Issar says. It’s best to do a proper examination before becoming somebody’s guardian angel.
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