For over two decades, The Law Codes has been assisting clients in Gurgaon and Chandigarh with specialized knowledge in civil and corporate law, particularly in handling complex guarantee-related issues. This article examines the rights and responsibilities of a guarantor, emphasizing their role and the legal implications of offering a guarantee.

What is a Guarantee?

Legally, a guarantee is a commitment by a third party (the guarantor) to cover the obligations of a borrower (the principal debtor) should they default. This assurance is common in financial and commercial dealings like loans, leases, and contracts. It provides additional security to creditors and aids businesses in obtaining financing, especially when the borrower lacks sufficient creditworthiness. A guarantee agreement stands separate from the main contract between the creditor and debtor, acting as an extra safeguard.

Legal Basis for Guarantees in India

The Indian Contract Act of 1872, specifically Sections 126 to 147, outlines the legal framework for guarantees, detailing the rights and responsibilities of guarantors.

The Role of a Guarantor

• Securing the Obligation: The guarantor promises that the debtor will meet their obligations, stepping in if they don't.
• Risk Undertaking: By becoming a guarantor, one takes on financial risk, liable to pay if the debtor fails.
• Providing Collateral or Co-signing: Sometimes, guarantors might offer additional security.

Rights of a Guarantor

• Right of Subrogation: After paying off the debt, the guarantor can pursue the debtor for repayment.
• Right to Seek Indemnification: The guarantor can claim compensation from the debtor for any payments made.
• Right to Challenge an Invalid Guarantee: If the guarantee was obtained through fraud or coercion, the guarantor can legally contest it.
• Right to Postpone Liability: If the debtor has a defense against the creditor, the guarantor can use the same defense.

Liabilities of a Guarantor

• Primary Liability: The guarantor becomes directly responsible if the debtor defaults.
• Liability in Case of Default: Creditors can pursue the guarantor independently or jointly with the debtor.
• Continuing Liability: The guarantor is liable for new debts if the guarantee continues.
• Liability with Multiple Guarantors: Each guarantor is responsible according to the terms of the agreement.
• Liability After Revocation: The guarantor remains liable for debts before the revocation notice.

Risks and Precautions for Guarantors

• Understand the Terms: Know exactly what you're agreeing to.
• Limit the Guarantee: Try to limit the scope or amount of the guarantee.
• Request Collateral: Ask for security from the debtor.
• Review the Financials: Evaluate the financial health of the debtor before committing.

References

• https://thelawcodes.com/article/rights-and-liabilities-of-a-guarantor/
• https://thelawcodes.com/corporate-lawyers-in-chandigarh/
• https://thelawcodes.com/corporate-lawyers-in-gurgaon/
• https://thelawcodes.com/law-firm-in-chandigarh/
• https://thelawcodes.com/law-firm-in-gurgaon/