Mr. Sameer Sharma found himself in a difficult financial situation. Years ago, when he was just a young adult, his family was involved in the redevelopment of their ancestral property in the city of Aravalli. His relative, Mr. Rohan Gupta, decided to take a substantial home loan of ₹50 lakhs from Apex Bank, mortgaging his portion of the redeveloped property. Due to the joint ownership structure of the land records at the time, Mr. Sharma, along with other family members, was required to sign as a guarantor for this loan. Lacking guidance, he signed the documents without fully understanding the long-term implications.

Now, more than a decade later, Mr. Sharma is 33, married with a child, and the sole earner for his family. He has discovered that Mr. Gupta defaulted on the loan several years ago, and there has been no resolution. This default has severely damaged Mr. Sharma’s credit score, making it impossible for him to secure a loan to buy his own home. Despite his impeccable record of paying his own credit card bills and personal loans on time, banks refuse to entertain his applications because of the guarantor status on a defaulted loan.

Advice in such cases

Being a guarantor is a significant legal and financial responsibility. If you find yourself in a situation similar to Mr. Sharma’s, here are some steps you can consider:

• Review the Guarantee Agreement: Obtain a copy of the loan agreement and the guarantee deed you signed. Understand the specific terms and conditions of your liability. Check for any clauses that might allow for your substitution or release.
• Communicate with the Borrower: The first step is to approach the principal borrower (in this case, Mr. Gupta) and urge them to clear the outstanding dues or regularise the loan account. Document all your communications.
• Negotiate with the Lender: Approach the bank or financial institution. Explain your situation and explore options. Sometimes, banks are willing to negotiate if a viable solution is presented.
• Find a Replacement Guarantor: You can request the bank and the borrower to substitute you with another person who is willing to act as a guarantor and meets the bank’s eligibility criteria. This is only possible with the consent of all parties involved.
• Offer a Settlement: In some cases, you might be able to negotiate a one-time settlement with the bank for a portion of the outstanding amount to secure your release from the guarantee. This is a complex step and should be done with legal guidance.
• Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think.

Applicable Sections of Law

The legal framework for loan guarantees in India is primarily governed by the Indian Contract Act, 1872. There is no direct application of the Bharatiya Nyaya Sanhita (BNS) unless there is an element of criminality like fraud or forgery.

• Section 126 of the Indian Contract Act, 1872: Defines a ‘contract of guarantee’. It involves three parties: the principal debtor (the one who takes the loan), the creditor (the bank), and the surety (the guarantor).
• Section 128 of the Indian Contract Act, 1872: This is a critical section which states that the liability of the guarantor is co-extensive with that of the principal debtor. This means the bank can legally recover the entire loan amount from the guarantor if the borrower defaults.
• Sections 133 to 141 of the Indian Contract Act, 1872: These sections outline the conditions under which a guarantor can be discharged from their liability. This can happen if the bank makes any changes to the original loan terms without the guarantor’s consent, releases the principal debtor, or impairs the guarantor’s eventual remedy against the principal debtor.
• The SARFAESI Act, 2002: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act allows banks to auction properties to recover dues without going to court. As a guarantor, your assets could also be at risk under this act if you have offered them as security.

If you are the complainant (the Guarantor)

If you are the guarantor and wish to seek legal recourse, here are the steps to follow:

• Gather all Documentation: Collect the loan agreement, guarantee deed, property papers, any communication with the bank and the borrower, and proof of the default.
• Send a Legal Notice: Your lawyer can send a legal notice to the principal borrower, demanding that they clear the dues and absolve you of the liability. A notice can also be sent to the bank, stating any legal grounds for your discharge (e.g., fraudulent inducement to sign, material changes in the loan agreement without your consent).
• File a Civil Suit: You may file a suit for declaration in a civil court, asking the court to declare the guarantee agreement null and void if there are strong grounds like misrepresentation or coercion at the time of signing.
• Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think.

If you are the victim (the Lender)

From the lender’s (bank’s) perspective, the process is straightforward and aimed at recovery:

• Issue Demand Notices: Upon default, the bank will issue demand notices to both the principal borrower and the guarantor, as their liability is co-extensive.
• Initiate Recovery Proceedings: If the dues are not cleared, the bank can initiate recovery proceedings through the Debt Recovery Tribunal (DRT) or under the SARFAESI Act.
• Report to Credit Bureaus: The bank will report the default against the names of both the borrower and the guarantor to credit information companies like CIBIL, which negatively impacts their credit scores.

How the police behave in such cases

A loan default is a civil matter, not a criminal one. Therefore, the police have no jurisdiction or role to play in such cases. Police involvement would only be warranted if there are allegations of a criminal offence, such as forgery of signatures on the guarantee documents, cheating, or criminal breach of trust. In such a scenario, a complaint could be filed, and the police would investigate under the relevant sections of the Bharatiya Nyaya Sanhita (BNS). However, for a simple case of default, all remedies lie in civil courts and tribunals.

FAQs people normally have

• Can a guarantor exit a loan agreement?
  Exiting is difficult but not impossible. It requires the consent of both the lender and the borrower, typically by providing a substitute guarantor or by settling the loan. A guarantor can also be discharged by law under specific conditions as laid out in the Indian Contract Act.
• What happens to my credit score if the borrower defaults?
  If the principal borrower defaults, your credit score will be negatively impacted just as severely as the borrower’s. The default is reported against your name as well.
• Can the bank seize my personal assets?
  Yes. As a guarantor, your liability is not just limited to the mortgaged property. If the sale of the mortgaged property is not sufficient to cover the debt, the bank can proceed against your other personal assets to recover the balance amount.

What evidence is required?

To build a strong case, you will need the following documents:

• The original loan agreement and the guarantee deed.
• Any correspondence (letters, emails) between you, the borrower, and the bank.
• Bank statements and notices of default.
• Documents of the property that was mortgaged.
• Any proof of misrepresentation, coercion, or fraud, if applicable.

How long will the investigation take?

Since this is a civil matter, there is no “investigation” in the criminal sense. The duration of the legal process can vary significantly. If the matter can be settled through negotiation with the bank, it might take a few months. However, if you need to file a case in court, the process can be lengthy, potentially taking several years, depending on the complexity of the case and the court’s schedule.

Advocate Sudhir Rao, Supreme Court of India