Personal Guarantee

Indian Contract Act, 1872 — Section 126; IBC, 2016 — Section 95

A guarantee provided by an individual (typically a director or promoter) to repay a borrower company's loan obligations. Upon company default, the bank can proceed against the guarantor's personal assets. Under the IBC (Section 95), a financial creditor can file an insolvency application against a personal guarantor of a corporate debtor, without waiting for the CIRP of the corporate debtor to conclude.

A personal guarantee is what lets a lender reach a promoter's private wealth when the borrowing company fails, and it has become a far sharper tool under the IBC. In practice, on company default the bank can proceed directly against the guarantor's personal assets, and under Section 95 IBC a financial creditor can file insolvency against a personal guarantor of a corporate debtor without waiting for the company's CIRP to conclude, a route that runs in parallel and pressures the promoter personally. Where the guarantor's own property is mortgaged, SARFAESI enforcement against it is also available. The guarantor's liability is generally co-extensive with the principal debtor's, so defences turn on the validity of the guarantee, discharge by variation of terms, or release of security. For promoters, the practical lesson is that incorporation does not shield personal estate once a guarantee is signed. Well-advised creditors confirm the guarantee is validly executed and subsisting before invoking it against the individual.