The Supreme Court has issued a major ruling on the liability of loan guarantors. Learn about the entire matter.

Supreme Court on Loan Guarantors: This decision by the Supreme Court is a relief for banks and financial institutions. It will save banks years of recovery.

Supreme Court on Loan Guarantors: People often take out loans to meet their needs. This requires a guarantor. A guarantor is a person who guarantees the repayment of the loan. Often, requests are made for a friend or relative to stand as a guarantor. They are assured that this is merely a formality. However, the Supreme Court recently issued an important ruling regarding the liability of loan guarantors. Let's explore the details of the matter.

The previous NCLAT decision was overruled

The Supreme Court on Thursday (February 26) ruled that under the Insolvency and Bankruptcy Code 2016, there is no bar to simultaneously initiating CIRP (Corporate Insolvency Resolution Process) against the main borrower and the corporate guarantor for the same loan. The ruling stated that under Section 128 of the Indian Contract Act, a guarantor has the same liability as the borrower. A bench of Justices Dipankar Datta and Augustine George Masih overruled the previous NCLAT decision in Vishnu Kumar Agarwal vs. Piramal Enterprises, finding it untenable.

Now, relief for the bank in recovering money

It had stated that if CIRP has already been initiated against one guarantor for the same loan, a second petition cannot be filed against the other guarantor or the main borrower for that loan. This was considered equivalent to two punishments for the same mistake. The court stated that banks can now initiate separate CIRP proceedings against the borrower and all guarantors simultaneously. The court believes that the guarantor also has responsibility for the loan, so the bank can pursue each person who guaranteed the loan until it receives its full share.

Under the previous rule, if two people guaranteed the same loan, the bank could only approach one person at a time. This would have taken years to recover the money, as it had the authority to initiate legal action individually. This will no longer be the case. Under the new rule, in the event of a default, the bank can file a case simultaneously against the borrower, the first guarantor, and the second guarantor—all three—on the same day. This Supreme Court decision is a relief for banks and financial institutions.

Loan Guarantors' Difficulties Increase

Previously, loan guarantors used to be complacent, believing that until the CIRP case against a defaulting company was resolved, there was nothing to worry about. Now, even if the company is sold, the bank can initiate proceedings in the NCLT to seize the promoter's assets. If the bank's debt remains unrecovered even after the company is sold, the bank can knock on the promoter's door to recover the remaining money. If the bank wishes, it can seize your fixed deposits, account balances, mutual funds, and commercial properties to recover its losses.