Role of Personal & Corporate Guarantor

Guarantors play a vital role when it comes to monetary dealings between a lender and a borrower. A guarantor is an individual who promises to pay the amount borrowed by an individual in case the borrower fails to return the money owed.
Guarantors are also known as ‘surety’ and act like insurance for lenders; in case the borrower defaults on their loan obligation, the lender can approach the guarantor to recover the money owed by the borrower. In rare cases, borrowers act as their own guarantors by pledging some assets to the lender in exchange for the funds.

Who is a Personal Guarantor?

Personal Guarantors are individuals nominated by the Borrower and acceptable to the bank that they shall, may or have given a Personal Guarantee to the bank for the money requested by the borrower.

Who is a Corporate Guarantor?

Any corporate entity that agrees to assume responsibility for paying the loan or other responsibilities of the Borrower, as defined in the contract, is referred to as a ‘Corporate Guarantor.’

Standard Provisions in case of Personal & Corporate Guarantors

• The Guarantor, by providing a guarantee, consents with the lenders that if, for any reason, some amount cannot be recovered based on a guarantee, the Guarantor shall become primary obligator to compensate the Lenders for any cost they may incur as a result of the Borrower failing to pay their dues on the date that they were expected to make the payment.
• Any amount demanded by the Lender from the Guarantor shall be final and binding. The scope of their liability shall be the amount demanded by the Lender. The Guarantor’s liability shall not be concerned with any dispute between the Lender and the Borrower or dependent on any arbitration or any other legal proceedings that is due before any Court. Any figure demanded by the Lender in accordance with the Guarantor’s guarantee shall, except in the case of any errors, be conclusive and final for the Guarantor, i.e., they shall be bound to compensate for any amount asked for by the Lender.
• If an amount owed by the Guarantor to the Lendor is not paid by the due date, the amount shall incur interest, at a rate mutually decided by the Lenders, from the date when the amount was due to be paid until the date when the entire amount is paid along with the interest on a daily basis. The entire amount shall be payable by the Guarantor.
• The Guarantor must compensate and keep the Lenders and their officers, employees, agents, etc., compensated for all the losses, damages, expenses, claims and liabilities they may have had to bear due to the relation with:
  - Any kind of failure or default by the Borrower/Guarantor.
  - The usage of any rights and powers the Guarantee provided to them or any applicable statute.
• The Guarantor can allow the Lender to have the right to reveal their name and specifics as well as the details of any credit facilities that the Borrower avails of or has already availed.
• The Guarantor would nod, promise and assure to comply with the following without any conditions:
  - If there is any default in relation to any payment or in the execution or violation of any responsibilities, the Lender, the Reserve Bank of India (RBI) and/or any authorized agency shall have the complete discretion and right to reveal or publish the Guarantor’s name as ‘defaulter’ in any way they deem appropriate.
  - As a prerequisite for granting various credit facilities to the Borrower, the Guarantor may accept and allow Lenders to disclose any data related to the Guarantor, responsibilities that they bear/are bound to bear and defaults committed by them. The Guarantor may permit the Lender to disclose these aspects however they deem fit with the entities authorized by the RBI in this regard.
  - The Guarantor would clarify and establish that all the details provided by the Guarantor to the Lenders are accurate and correct. In addition, the Guarantor shall agree to the Lender using and processing the details as they deem fit. Further, they shall also allow the Lender to furnish the details provided by the Guarantor along with any products prepared by them to any bank or financial institution for consideration; the Guarantor shall agree to not have any issue or raise a question in relation to these aspects.
• The Guarantor may choose to accept to not sell, transfer, encumber, charge, pledge, hypothecate, mortgage, or create any hold on any properties belonging to them without obtaining a written approval from the Lender for the same.
• In case of Borrower’s liquidation, the Personal Guarantor shall not take part in the competition with the Lenders in the liquidation process.
• The Corporate Guarantor shall agree to not initiate liquidation voluntarily for as long as the guarantee is still in force and the all payments and dues have been cleared out and a ‘No-Dues Certificate’ is obtained from the Lender.
• Following would not affect the liabilities of the Guarantor:
  - Modifications to the Constitution of India, winding up of the Borrower, any absorption, merger/reverse merger/demerger or amalgamation of the Borrower with any other entity.
  - Changes in the Borrower’s management or takeover of the Borrower by some Government authority or some other authority.
  - If the Borrower or any of their undertakings are acquired or nationalized in accordance with any law.
  - Amendments to the Constitution of Lenders.
  - In the case of Guarantor’s insolvency or death, the administrator or lawful successor of the Guarantor shall become bound by the provisions of the agreement.
  - Any intermediate payment or any part of the facilities being satisfied.
  - Any obligation of any other person, in part or full, is illegal, invalid, irregular or unenforceable as per the Restructuring Documents, guarantee or any other contracts or securities.
• The Guarantor may consent to and convey that the rights and power granted to Lenders through a Guarantee shall be joint and several.
• The Guarantor may consent to and convey that the rights and power granted to Lenders through a Guarantee can be used by any Implementing Agency, which is acting on behalf of the Lenders.
• The Guarantor shall declare that no guarantee favoring any individual has been given, apart from the Guarantee provided to the Lenders.
• The Guarantor’s payments to the Lenders shall be free and clear of and without any deductions or withholding for or on account of tax unless the deduction or withholding is necessitated under any applicable law. In this case, the amount that must be paid by the Guarantor with respect to which such deductions or withholding need to be made shall be increased to a point that is required to make sure that, after making the required deductions or withholding, the Lenders shall receive and retain the amount they would have received in case no deductions or withholding was made.
• The Guarantor shall undertake the responsibility of paying all the taxes, registration charges, stamp duty, and any other charges levied to which the Guarantee may be subject to and compensate the Lenders for any costs they bear due to the failure to pay or delay in paying the above-mentioned tax, registration charges, stamp duty and any other charges levied.
• Any right of the Guarantor to be indemnified by the borrower or to take the benefit of or enforce any security or other guarantee or indemnity may be used and enforced by them only in the manner and on the terms required by the Lenders and any amount received or recovered by the Guarantor by exercising any such right shall be held in trust for the benefit of the Lenders and immediately paid to them.
• The Guarantor cannot assign, transfer or replace their rights and responsibilities. In addition, the Guarantor may not claim to have assigned, transferred or replaced any of their rights and responsibilities.
• The Guarantor may give up their suretyship along with other rights that the Guarantor would otherwise have the right to enforce to favor and for the benefit of the Lenders.

Difference between Personal Guarantor & Corporate Guarantor

S.N-	PARTICULAR	PERSONAL GUARANTOR	CORPORATE GUARANTOR
1	Meaning	Personal Guarantor refers to an individual who is approved by the Bank in writing or an individual who gives a personal guarantee which is acceptable to the Bank.	A Corporate Guarantor refers to a corporate entity that agrees to undertake loan payments and/or other responsibilities for the Borrower, as stated in the agreement.
2	Eligible	Individual	Corporate or any corporate body
3	Under IBC	Section 5(22) of the Insolvency and Bankruptcy Code, 2016 defines ‘Personal Guarantor’ as an individual who acts as an insurance in a contract to a corporate borrower.	Section 5(5A) of the Insolvency and Bankruptcy Code, 2016 provides the definition for ‘Corporate Guarantor,’ who is basically an insurance in a contract of guarantee to a corporate borrower.
4	Responsibility	Responsible for repaying the loan amount as per the agreement upon the individual.	Responsible for repaying the loan amount as per the agreement upon the Corporate.
5	Guarantee for Subsidiary Companies	Not applicable	In this, the guarantor consents to undertake the responsibility for the debtor's responsibilities, like repaying a debt, making payments by due date, etc. By providing a guarantee that the loan taken shall be repaid, a company basically assures that if there is any default, they assure to repay it in place of the Borrower.
6	Under Companies Act	Personal Guarantor means the director of the company who gives a guarantee on behalf of the company to pay the debt.	Corporate  Guarantor means a company who gives a guarantee on behalf of its subsidiaries or the group of companies to pay the debt.
7	Obligation	Liability to repay the amount on the individual in case of default.	Liability to repay the amount on the Corporate in case of default.
8	Limited	Personal Guarantor will give a limited guarantee to a certain sum of amount to be repaid.	Corporate Guarantor will give a limited or unlimited guarantee for the amount which is to be repaid.
9	Claim under IBC	The lender will claim its debt from the person who gives the personal guarantee under this Act and the liability of the guarantor is co-extensive with that of the borrower.	The lender will claim its debt from the person who gives the corporate guarantee under this Act; the guarantor’s liability is consistent with that of the borrower.

Guarantee under External Commercial Borrowings (ECB)

AD Category I banks (authorised to deal in foreign currencies and help individuals and businesses buy and sell foreign currencies) are allowed to permit the creation/termination of charges on both movable and immovable assets, along with financial securities. They may also permit issuance of corporate/personal guarantees favoring overseas lenders or security trustees with the aim of securing the ECB raised/that must be raised by the Borrower. However, this shall be subject to such banks being satisfied of the following:

• The fundamental ECB complies with the ECB guidelines currently applicable.
• The loan agreement carries a security clause that requires the ECB Borrower to create or cancel charge, favoring some overseas lender or security trustee on movable or immovable assets, financial securities and on issuing personal and/or corporate guarantees.
• A ‘No Objection Certificate’ must be procured from existing lenders in India in instances where charges have been created.

Conclusion

Considering Lenders will be giving out their own finances to individuals/entities unknown to them, they shall only choose to bear this risk when they have some security related to getting their funds back one way or another. As such, when a trustworthy personal or corporate guarantor enters the picture to vouch for a Borrower and assures to be liable in case of any default by the Borrower, Lenders are much more comfortable and likely to lend the required finances to the Borrower.