INTRODUCTION
It is quite common for banks and lenders to insist upon the personal guarantees of the managing directors/promoters/partners, in case of loans extended by them to business entities. In addition, one generally also comes across requests from family members and friends to stand as a guarantor for business loans taken by them. Most people would sign on the dotted line. However, pause for a moment and consider the legal consequences of such a personal guarantee. In light of the Insolvency & Bankruptcy Code, 2016
(“the Code”), the position has become quite different than what it was earlier. Also, some Supreme Court decisions in this respect have made the situation even more peculiar.
INDIAN CONTRACT ACT
The Indian Contract Act, 1872 deals with contracts of guarantee and lays the framework for all guarantees. A “contract of guarantee” is defined as a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written. The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract. The Contract Act gives an illustration in this r
