A guarantor is a person who promises to repay a loan if primary borrower fails to do so. Banks often ask loan borrower to provide a guarantor for loan. By doing so, Banks make their loan secure. If borrower does not pay back loan, then Banks can approach Guarantor to repay the loan.
But have you ever thought – what are the rules and guidelines for a guarantor? In this article, we will tell you in detail about the liability of guarantor and what will happen after his death. Will the legal heirs of guarantor be liable to pay back loan?
Let’s understand what is personal guarantee?
A personal guarantee is a legal agreement where the guarantor assures repayment of a loan or debt if the borrower defaults.
- Guarantor: The person who gives the guarantee.
- Principal Debtor: The person or company borrowing the money.
- Creditor: The person or entity lending the money.
As per the Indian Contract Act, 1872 (Section 126), a guarantor’s obligation is to cover the debt if the borrower cannot pay. If the guarantor dies, the liability doesn’t automatically vanish. The bank or lender can still recover unpaid amounts from the guarantor’s estate (the assets they leave behind).
Are Legal Heirs Responsible for the Guarantor’s Debt?
A common misunderstanding is that the guarantor’s death cancels the debt. This is not true. The deceased guarantor’s legal heirs may be responsible for the outstanding debt, but only to the extent of the estate (property, investments, or money) they inherit from the guarantor.
In a ruling by the Supreme Court in the case Vinayak Purshottam Dube (Deceased) vs. Jayashree Padamkar Bhat (2024), it was clarified that:
“Legal representatives are liable for the debts of their predecessor, but only up to the extent of the inherited estate.”
In simple terms, legal heirs won’t have to pay the debt from their personal income or assets. They are liable only for what they inherit from the deceased guarantor.
Impact of Insolvency on Legal Heirs
Now, let’s consider a situation where the legal heirs themselves are facing insolvency under the Insolvency and Bankruptcy Code (IBC), 2016.
- Section 96 of the IBC provides a temporary halt (interim moratorium) on legal proceedings against someone undergoing insolvency.
- However, this protection applies only to the person’s personal debts, not to debts inherited from a deceased guarantor.
The inherited estate must still be used to settle the guarantor’s liabilities. This distinction was reinforced by legal interpretations that focus on the difference between personal debts and inherited liabilities.
Key Legal Rulings on Insolvency and Personal Guarantees
Various judgments have addressed whether insolvency proceedings can continue after a guarantor’s death. Some of the important cases are:
- NCLT Delhi (Alchemist Asset Reconstructions Company v. Deepak Puri, 2021): The insolvency proceedings were stopped after the guarantor’s death.
- NCLT Kolkata (Bank of Baroda v. Divya Jalan, 2022): The tribunal ruled that proceedings must close after the guarantor’s death, as the liability is personal and doesn’t transfer automatically.
- Contrary View (Invent Assets vs. Popatlal K. Jain, 2023): NCLT Mumbai took a different stance, allowing the legal heirs to be added to ongoing insolvency proceedings.
The IBC does not clearly explain what should happen when a guarantor dies during insolvency proceedings. This has led to inconsistent rulings by different tribunals.
