RIGHTS AND LIABILITIES OF A GUARANTOR
Rights and Liabilities of a Guarantor
For over 20 years, The Law Codes has been serving clients across Gurgaon and Chandigarh with expertise in civil and corporate law. Our firm has earned a reputation for handling complex legal issues, including matters related to guarantees, which are often crucial in corporate and financial transactions. In this article, we will explore the rights and liabilities of a guarantor, shedding light on their role and the legal implications of providing a guarantee.
What is a Guarantee?
In legal terms, a guarantee is a promise made by a third party (the guarantor) to fulfill the obligations of a borrower (the principal debtor) in case of default. A guarantee is typically used in commercial and financial agreements, such as loans, leases, and contracts. The guarantor assures the lender or creditor that the debt will be repaid or the obligation will be fulfilled, even if the principal debtor fails to do so.
A guarantee agreement is a separate contract from the primary contract between the creditor and the debtor. It serves as an additional layer of security for creditors and helps businesses secure financing, particularly in cases where the borrower may not have sufficient creditworthiness.
Legal Framework of a Guarantee
In India, the law governing guarantees is primarily found under Sections 126 to 147 of the Indian Contract Act, 1872. These provisions outline the rights and liabilities of the parties involved in a guarantee arrangement, focusing on the guarantor’s role and the obligations they undertake.
The Role of a Guarantor
1. Securing the Obligation
The guarantor provides a guarantee that the principal debtor will fulfill their obligation. If the debtor defaults, the guarantor steps in to fulfill the debt or liability.
2. Risk Undertaking
The guarantor assumes a financial risk because they are legally bound to fulfill the commitment if the debtor defaults. This makes it an important decision for anyone acting as a guarantor.
3. Collateral or Co-signing
In some cases, a guarantor might also provide collateral to further secure the guarantee.
Rights of a Guarantor
1. Right of Subrogation
If the guarantor has paid the debt or fulfilled the obligation of the principal debtor, they acquire the rights of the creditor to recover the amount from the principal debtor.
2. Right to Seek Indemnification
The guarantor can seek indemnification from the principal debtor if they are forced to settle the debt, including costs or interest incurred.
3. Right to Seek Relief if Guarantee is Invalid
If the guarantee is invalid due to lack of consent, fraud, or coercion, the guarantor can challenge the validity of the guarantee in court.
4. Right to Postpone Liability
If the principal debtor has a valid defense against the creditor, the guarantor can use that same defense to avoid liability.
Liabilities of a Guarantor
1. Primary Liability
The guarantor assumes primary liability for the debt or obligation if the principal debtor defaults.
2. Liability in Case of Default
The guarantor’s liability is joint and several, meaning the creditor can sue the guarantor alone or alongside the debtor.
3. Continuing Liability
The guarantor remains liable for future debts or obligations of the principal debtor if the guarantee is continued.
4. Liability in Case of Multiple Guarantors
Each guarantor is responsible for the debt to the extent specified in the guarantee agreement.
5. Liability After the Guarantee is Revoked
The guarantor’s liability remains in force for debts incurred before the notice of revocation is provided.
Risks and Precautions for Guarantors
- Understand the Terms
- Limit the Guarantee
- Request Collateral
- Review the Financials
Frequently Asked Questions – FAQs
1. What is the role of a guarantor?
A guarantor ensures the fulfillment of a borrower’s obligation and assumes liability in case of default.
2. Can a guarantor revoke their guarantee?
Yes, a guarantor can revoke a guarantee by providing notice to the creditor, but liabilities remain for debts incurred before the notice.
3. What is the right of subrogation for a guarantor?
It allows the guarantor to step into the shoes of the creditor to recover the amount from the principal debtor after paying the debt.
4. What happens if there are multiple guarantors?
Liability is distributed as per the guarantee agreement, but guarantors may cover each other’s shortfalls if one cannot pay.