Do Not Worry about Being a Loan Guarantor
You are protected
You are protected
“In the old days, when you took out a mortgage, it was probably through a local bank ora credit union, and whoever gave you your loan held onto it for life. If you lost your job or got too sick to work and suddenly had trouble making your payments, you could call a human being and work things out.” – Matt Taibbi
Until a few months ago, to stand as a guarantor before a bank for a friend seeking a loan was one of the most difficult decisions one had to make. While a blatant ‘no' could strain the relationship, agreeing to become a guarantor meant the possibility of having to face ruthless recovery agents. If you have not faced harassment yourself for being a guarantor for someone, you would have known somebody who repented standing as a guarantor for someone, faced legal notices, or even had to tackle unexpected visitors from the lending banks or companies. From the bank's perspective, the guarantor is treated as good as the borrower and hence it is the responsibility of the guarantor to clear the loan. Until recently, the guarantor really had no clearly defined legal procedure to fall back upon.
In some cases, the loan agreements have clauses wherein the guarantor is liable to pay on behalf of the borrower until the loan is settled. Although the amount paid by the guarantor is supposed to be returned by the borrower as per the law, it does not happen often and the guarantor mostly has to seek legal help to claim the same (or avoids doing so as the borrower is a known individual). Some banks go to the extent of spoiling the guarantor’s personal credit score by sharing negative information with credit-rating agencies, thereby impairing his chances of obtaining any loan in the future from any bank or non-banking finance company (NBFC).
Now, though, with the introduction of Insolvency and Bankruptcy Code (IBC) 2016, things are changing—and changing for the good. The code not only limits the liability of the guarantor, it also protects his right to claim his money back from the bank or the NBFC.
IBC came into effect from 15 December 2016 and the Delhi bench of the National Company Law Tribunal (NCLT) started admitting cases under the same from January 2017. A case filed by a guarantor (under insolvency resolution proceedings for a loan where the borrower had taken the loan from a bank but failed to repay it) was admitted in January and opened doors for many such cases that would reach the tribunal later in the year.
In this case, the guarantor had approached NCLT under IBC against the ‘main borrower’ (for whom he stood as guarantor), to recover dues that the lending bank had collected from the guarantor. The corporate debtor had mortgaged immovable property with the bank against the loan while he was the guarantor.
As per IBC, after the case is ‘admitted’, the guarantor will be able to recover his dues within 270 days of admittance of the case as the creditors have to come up with a revival plan within 270 days.