by Razia Sultana, Associate
In a lending scenario by a Company, usually lenders require personal guarantee from the directors of the company. A personal guarantee is a type of guarantee where one or more company directors personally guarantee to repay any debts of their business if the company face any financial crisis or unable to meet its financial obligation. A personal guarantee risks their own personal assets. A director’s personal guarantee may be used in many situations, including:
- Bank loan or overdraft applications
- Invoice financing arrangements
- Commercial property
- Trade supply deals
- Investment deals
disadvantage of the personal guarantee is when the business unable to pay its
debt, the personal guarantee becomes personally liable for it. This means that
the company creditors can pursue personal guarantee and can put their personal
assets at risk including home as well.
Requirements for a Guarantee
documents are called guarantee but actually they are not. There are few factors
which court takes into accounts. These are:
- Proper interpretation
- Title of document
- Substance over a form.
are a number of formal requirements to be a guarantee.
of guarantees: it must be evidenced in writing in a
formal contract or agreement, note, memorandum or promissory note.
guarantee or their authorized agent should sign it. The name must be written or
printed, as long as it is operated as a signature.
- Secondary Liability: Establish
that the guarantor has secondary liability to perform the guaranteed
obligation. The principal debtor has primary liability.
documents should satisfy the requirements of any contract. That means, offer
and acceptance, contractual consideration, an intention to be legally bound and
capacity to enter into the contract.
long is a personal guarantee enforceable?
guarantor’s liability is “coextensive” with the debtor. Whatever the debtor is
liable for to the creditor, is the liability of the guarantor. If the debtor’s
liability is released, so is the liability of the guarantor.
promissory note is a document whereby the borrower makes a promise to the
banker to repay the loan amount on demand with the agreed rate of interest.
The Promissory Note Due on the Demand document if:
- You are making a loan to
- You are borrowing money
from a private party.
- You want to determine the
amount of a monthly payment on a loan.
Mortgages vs. Promissory Notes
The homeowner generally
thinks that their mortgage as an obligation to repay the money they borrowed to
buy their own residence or property. But actually, they sign a promissory note,
as part of their financing process. This document represents that promise to
pay back their loan along with repayment terms. The promissory note is also
another way where some people don’t qualify for a mortgage, they also can
purchase a home.
Name of the Guarantor may appear as the guarantor only in the CIB
In the case Anwar
Cement Ltd vs. Bangladesh Bank and others, the Division Bench of Hon’ble
court presided over Justice Jinat Ara passed a Judgment and order dated
24.04.11. It is stated in this case that
the in the CIB report of Bangladesh Bank the name of the guarantor may appear
in the CIB report as a guarantor only and not as defaulting borrower.
However, in the
previous case law refers that the guarantor’s name cannot appear in the CIB
report at all is hereby overruled. Article 43 of Bangladesh Bank Order 1972 as
well as CIB circulars 01/1994 inserting someone’s name in the CIB report does
not automatically mean that it is classified as defaulting borrower as per the
provisions of section 27(kaka) of Bank Company Ain 1991.
Sec 17(1) of the
Banking Act 1991 stated that consequences of default of payment by the
directors-Directors of the default loanee is vacated on the expiry of the
period of two months notwithstanding the subsequent rescheduling of the loan
and repayment of ten percent of the outstanding loan.
In the case Major
MonjurQuadar (Reted) V Bangladesh Bank, it stated that in section 27 Kaka
of the Bank Companies Act, 1991 came into force when the petitioner was neither
a share holder of the company nor a Member of the Board of Directors of the
borrower company, his share having been validly transferred prior to that date,
he is only liable for repayment of the loan by virtue of his personal guarantee
to the bank. As stated in our judgment in Writ Petition No. 3931 of 2001, a
guarantor’s liability will not attract the provisions of section 27 Kaka of the
Bank Companies Act, 1991 and, as such, the petitioner’s name cannot be included
in the CIB list.
Recovery process can be
divided in two ways. Pre –legal way and the Legal way. Pre- legal way of
recovery is done by the banker himself and legal way of recovery is done with
the help of court/law.
We have to keep in mind that bank’s money is public money. It’s a common responsibility for the
borrowers to repay the borrowed money within the due time, simultaneously, as a
it becomes responsibility of all the bankers to recover the money within the
due date. One of the main reasons for which lending money become stuck up is
lack of monitoring. Generally, start recovery process after a loan becomes
stuck-up. But this is totally wrong process. Recovery should be started from
the date of disbursement of the loan. Proper monitoring of loan can prevent it
from being classification. Account transaction of the loan account of the
borrower must be monitored. Following subjects may be monitored in case of a
continuous loan account.
Transaction must be in conforming with the business of the borrower. If any
suspicious transaction seems to be happened, clarification regarding the
transaction must be obtained from the borrower. Un-related business transaction
indicates that the borrower diverts the fund elsewhere.
amount of single withdrawal by the borrower must be monitored. If it is not
conforming with the business nature of the borrower, the loan must be called
Lowest balance of the continuous loan account must be monitored after a
regular interval. If the lowest balance is always high it indicates that the
borrower may block a certain amount which he is not getting back. This is not
good for the future of loan.
4. Stock position as well as receivables must
be match with the outstanding balance of the loan account. If the stock is
found less than the outstanding balance then it indicates that either borrower
has diverted the fund elsewhere or he has bad debts which are bad sign for the
Visit the client on a regular basis even if his payment is regular. In
case of business client, borrower’s business house, factory, stock has to be
visited on regular basis to see whether everything is going on perfectly or
not. When a loan will be monitored in such a way, a borrower will remain alert
to repay the loan and bankers will also be relaxed to know the actual position
of a loan
Bank may give early reminder to their client before the due date in a
very gentle way. Early reminder may be given by SMS, Email, letter or even by
phone call. If any borrower misses the due date a further gentle reminder may
be given to the client. If any borrower fail to repay the dues and does not
response after reminder, bankers must visit to the client’s office or house to
physically meet with him to recover the money. If necessary, visit the
guarantors for recovery of the money.
If bank have any pledge/hypothecated goods under control against any
loan, bank may take possession of the goods and arrange to sell the goods
through auction towards adjustment of the liabilities. If Bank has any mortgage
property against any loan and if bank takes power of Attorney u/s 12 of Artha
Rin Adalata Ain to sell the property, bank may arrange auction to sell the
property without intervention of the court through auction sale. This is the
last step of Pre-Legal way for recovery of the loan.
When a borrower fails to adjust the loan and a loan becomes classified
or going to be classified or become stuck-up due to acceptable reasons, in that
situation bankers have some option to reschedule/restructure the loan for a certain
period of time (as per rule of central bank) to assist the borrower to repay
the loan. Bankers should use this option for the borrowers who are not willful
defaulter and who are willing to repay the loan.
Training is important for the person who will
be involved in recovery process. Capacity building of the officers is very
important. Try to involve efficient officers in recovery team who can exert
their professionalism to recover the money. Bankers must be professional while
recovering the money. Bankers must behave professionally with the borrower in a
polite manner while recovering the money. Never be rude with the borrower and
be friendly while recovering the money.
Involvement of high official in recovery
process directly is another important task. Though all the Banks have a
recovery department headed by a divisional Head but top management of the Bank
must be involved in the matter directly which will help accelerate recovery
process. Necessary authority must be given to the recovery manager so that he
can give any decision to the defaulted borrower in a shortest possible time or
instantly. Sometimes recovery of money may be jeopardized due to a lack of
proper and timely decision.
In the conclusion, we can say that when the
business unable to pay its debt, the personal guarantee become personally
liable for it and the company creditors can pursue personal guarantee and can
put their personal assets at risk. There are a number of formal requirements to
be a guarantee. Form of guarantees, Signed, Secondary Liability and
the guarantor/ borrower takes loan from the bank they need a document named
promissory note. This document states that the borrower makes a promise to the
bank to repay the loan amount on demand with the agreed rate of interest. Sec
3(1) of the Bank Company Ain, 1991 stipulates that when providing loans & advances and other financial facilities to bank
directors, their relatives & their affiliated entities like loan limit,
loan approval and prior approval by Bangladesh bank.
The case Anwar
Cement Ltd vs Bangladesh Bank and others, it is stated that in the CIB
report the name of the guarantor may appear in the CIB report as a guarantor
only and not as defaulting borrower. However, in the previous case law refers
that the guarantor’s name cannot appear in the CIB report at all is hereby
overruled. This means that the name of the guarantor may appear in the report
as guarantor and not as borrower.