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DEEPAK ROHERA (Senior Accountant) (285 Points)

31 July 2012

What is the liability of a guranter of a loan

example : i am a guranter in a personal loan taken from nationalized bank by my friend now his a/c is going NPA than i recd a notice from a advocate of bank in that the giving me a time of 10 days for repayment of loan other wise they file a suit against me and borrower

than i want to know that how much my liability is create when the borrower is alive and in approach of bank

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Tehsinkhan Pathan (CA CMA DISA(ICAI) B.COM) (3956 Points)
Replied 31 July 2012

"the liability of the guarantor and principle debtors are co-extensive and not in alternative"

This means, the legal liability of a guarantor is exactly same as that of original person taking the loan. As per law, the legal position of a guarantor turns into borrower’s, in case, original borrower defaults. Here, the guarantor is legally bound to pay outstanding debt, if the original borrower is not traceable. In doing so, even his personal assets are liable to be sold off, if required to clear the debt.

Banks approaches the guarantor only when they have exhausted all their resources to get the borrower to pay up. After that it’s the sole discretion of the lender as to which mode it decides to adopt for recovery of its dues. Banks usually have two options:

1) File a suit jointly against the borrower and guarantor;

2) Take the possession of the attached security, if any, under securitization act. Auction the property and recover their dues.

Banks, more often, adopt the first strategy to sue borrower and the guarantor for remaining debt. If guarantor also runs away then the property is auctioned. Alternately, banks may auction the property first and for any un-cleared debt approach the guarantor. It is completely at the discretion of banks.

However, auctioning a property is usually the last resort for banks, even though they take possession, as it’s a cumbersome process.

ALSO CONSIDER SECTION - 3(1) OF "THE GUARANTORS' LIABILITY ACT"

Action against guarantor
Sec 3(1)Notwithstanding that he is not a party to the bond, a creditor may, subject to the terms and conditions of the bond, upon obtaining a judgment for the debt against the bondee, recover the debt and the cost of obtaining the judgment, awarded as part of the judgment, from the guarantor and for that purpose may bring and maintain an action against the guarantor in a court of competent jurisdiction.