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Business News/ Money / Personal Finance/  What should a guarantor do if the principal borrower defaults?
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What should a guarantor do if the principal borrower defaults?

Under the Indian Contract Act, 1872, the liability of the guarantor is co-extensive with that of the principal debtor unless it is otherwise provided by the contract

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My younger brother had stood guarantee for a loan taken by his friend three years back. At the time, my brother had no job or financial stability, and also did not fulfil any other eligibility norms required to be a guarantor. He was also ignorant of the consequences of his actions. Recently, the principal borrower defaulted on the loan payment and even skipped town. Soon after, we found a letter of loan recovery on our doorsteps and now we are worried that we will have to pay the remaining loan amount.

What legal action can be taken in such a scenario and how do we hold the principal borrower legally accountable for such misconduct?

—Name withheld on request

Under the Indian Contract Act, 1872, the liability of the guarantor is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. Thus, your brother is obliged to repay the debt and other amounts in terms of the guarantee or else, he may be considered as a willful defaulter to the bank/ financial institution. Given the facts you have narrated to us, we understand that the letter of recovery is issued by a bank and the principal borrower is an individual and not a corporate body and that your brother is in receipt of the same.

One requires to ascertain the details of the terms and conditions of the guarantee provided by the guarantor (your brother in this case) to the bank as normally the guarantor is liable to repay the full amount which the borrower owes the bank. You may seek clarification from your brother, if the contract between the bank and the principal borrower has been altered after the issuing of the guarantee. In such circumstances, the guarantor may approach the bank and reply appropriately.

It is indeed unfortunate that the borrower has fled, but there are only limited defences that your brother may have as a guarantor and your brother is liable to repay the loan availed by the principal borrower and other outstanding payable thereon. The lender can sue the guarantor directly without proceeding against the borrower/ principal debtor i.e. your brother’s friend. The guarantor does not have the right to dictate terms to the bank as to how it should make the recovery and pursue its remedy against the principal borrower.

Later on, your brother as a guarantor is eligible to proceed against the principal borrower (his friend) on payment of debt to the bank to recover the payments.

Aradhana Bhansali is a partner at Rajani Associates

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Published: 15 Nov 2022, 09:55 PM IST
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