Everything You Need to Know About Personal Guarantors

In the world of finance and lending, personal guarantors play a significant role in facilitating transactions and providing assurance to lenders. Whether you're a borrower seeking financing or an individual considering guaranteeing a loan, understanding the ins and outs of personal guarantees is crucial. In this comprehensive guide, we'll delve into everything you need to know about personal guarantors in the Indian context.

What is a Personal Guarantor Under IBC?

A personal guarantor under IBC is an individual who agrees to be liable for the repayment of a loan or debt if the primary borrower fails to do so. By providing a personal guarantee, the guarantor assumes responsibility for fulfilling the financial obligations of the borrower in case of non-payment.

Significance of Personal Guarantees

Personal guarantees hold significant importance in lending transactions for several reasons:

1. Enhanced Lender Confidence: Personal guarantees provide lenders with an additional layer of security, boosting their confidence in the borrower's ability to pay back the loan.
2. Increased Borrowing Capacity: For borrowers, having a personal guarantor may improve their chances of securing financing, particularly if they have limited credit history or insufficient collateral.
3. Risk Mitigation: Guarantees help mitigate the risk of default for lenders, as they have recourse to the personal assets of the guarantor in case of non-payment by the borrower.

Responsibilities of a Personal Guarantor

As a personal guarantor, individuals have certain responsibilities and obligations, including:

1. Understanding the Terms: Before agreeing to serve as a guarantor, it's essential to thoroughly understand the terms and conditions of the guarantee, including the extent of liability and potential consequences of default.
2. Financial Disclosure: Guarantors may be required to provide financial information to the lender to assess their ability to fulfill the obligations of the guarantee.
3. Timely Repayment: In the event of borrower default, the guarantor is responsible for ensuring timely repayment of the outstanding debt to the lender.
4. Legal Liability: Guarantors should be aware that they could face legal action and potential financial repercussions if they fail to meet their obligations under the guarantee.

Risks and Considerations

While personal guarantees offer benefits for both borrowers and lenders, they also entail certain risks and considerations:

• Financial Liability: Guarantors expose themselves to financial liability and potential loss of personal assets in case of borrower default. All assets, except those specifically excluded, will be listed in the statement of affairs of the guarantor. Excluded assets, as defined by Section 79(14), comprise:

(a) Tools, books, vehicles, and equipment necessary for the debtor's personal use or employment, business, or vocation, provided they are unencumbered.

(b) Furniture, household equipment, and provisions essential for fulfilling the basic domestic needs of the debtor and their immediate family, if unencumbered.

(c) Unencumbered personal ornaments of a certain prescribed value, currently set at Rs. 1 lakh, which hold religious or sentimental value for the debtor or their immediate family.

(d) Unencumbered life insurance policies or pension plans held by the debtor or their immediate family.

(e) An unencumbered single dwelling unit owned by the debtor, valued within prescribed limits (currently set at Rs. 20,00,000 in urban areas and Rs. 10,00,000 in rural areas). If the value exceeds these limits, the guarantor must pay the creditors the surplus amount or sell the asset, with the guarantor receiving the prescribed limit amount from the resolution professional.

In cases of joint ownership, the resolution professional must obtain no-objection letters from other joint owners consenting to partition before including the asset in the repayment plan.

• Credit Implications: Serving as a guarantor could impact the guarantor's creditworthiness and borrowing capacity, as lenders may consider the guarantee when assessing their financial standing.
• Legal Ramifications: Guarantors should be aware of the legal implications of providing a personal guarantee, including potential legal action and enforcement measures by lenders in case of default.

Challenges and Controversies

Despite their widespread use, personal guarantees have been the subject of controversy and legal disputes. Issues such as ambiguity in guarantee terms, disputes over enforceability, and challenges in recovering debts from guarantors have raised concerns among stakeholders.

Conclusion

In conclusion, personal guarantors play a crucial role in facilitating lending transactions and providing assurance to lenders. By weighing the benefits, risks, and legal considerations associated with personal guarantees, individuals can make informed decisions that meet their financial goals and interests. One can turn to financial services to help navigate the complexities of these processes. Ancoraa Resolution, a financial services firm, features its Rezolution Engine®, that simplifies insolvency, debt resolution, and liquidation processes. It's India's first 'Resolution-as-a-Service' platform, offering a unified digital solution for compliance with the Insolvency & Bankruptcy Code. Whether you're a supplier, homebuyer, bank, or personal guarantor, it enables easy initiation of insolvency applications and ensures compliance throughout proceedings.