Personal Guarantee Invocation by Banks: Promoter Liability, IBC Part III and Defences

Section 128 of the Contract Act provides that the liability of a surety is co-extensive with that of the principal debtor unless the contract otherwise provides. Indian courts have consistently read this to mean that a creditor is under no obligation to exhaust remedies against the borrower or the security before proceeding against the guarantor. The bank can issue a demand, file a recovery application before the DRT against you personally, and pursue your personal assets in parallel with enforcement against the company's charged assets.

Standard bank guarantee deeds go further. They are typically expressed to be continuing guarantees covering all present and future facilities, unconditional, unaffected by variation of terms, release of co-guarantors, or the bank's failure to perfect security. Each of those clauses removes a defence that would otherwise be available under Sections 133 to 141 of the Contract Act.

The practical consequence is that a promoter's personal exposure is usually live from the moment of default, not from the conclusion of proceedings against the company. Promoters who assume they have years while the corporate matter runs are frequently served with a personal insolvency application in the interim.

Since the notification of 15 November 2019 bringing into force the provisions relating to personal guarantors to corporate debtors, creditors have a powerful additional route. An application under Section 95 of the IBC against a personal guarantor is filed before the same NCLT bench seized of the corporate debtor's matter, and the threshold default is only ₹1,000.

The process runs through a resolution professional who examines the application and reports to the adjudicating authority, followed by an interim moratorium that protects the guarantor from other legal action in respect of the debt while it runs. If no repayment plan is approved, the guarantor may be adjudged bankrupt — with consequences extending to disqualification from directorships and the vesting of the estate in a trustee.

The Supreme Court's decision in Lalit Kumar Jain v. Union of India (2021) upheld the notification and confirmed that approval of a resolution plan for the corporate debtor does not by itself discharge the guarantor. This settled a widely held misconception: promoters cannot rely on the company's resolution to extinguish personal liability.

The defences most commonly asserted by guarantors — that the bank should have proceeded against the security first, that the company's account was wrongly classified, that the guarantee was signed under commercial pressure — almost always fail. Co-extensive liability disposes of the first; the second is a matter between the bank and the borrower; the third rarely meets the legal standard for coercion.

The defences that do succeed are documentary and technical. Was the guarantee properly executed and stamped? Does the deed actually cover the facility now in default, or was it given for an earlier, since-repaid facility? Was there a material variation of the principal contract without the guarantor's consent, in circumstances where the deed did not waive Section 133? Was the guarantee discharged by the creditor's own act — release of security, loss of security through the bank's negligence, or a composition with the principal debtor under Section 135?

There is also the question of quantum. Guarantors routinely accept the bank's claimed figure without examining it. Interest computation, penal interest applied contrary to the sanction terms, and charges levied after the account turned NPA are all contestable, and on a large exposure the difference is often substantial.

The first step is to obtain and read the actual executed guarantee deed, not the sanction letter's summary of it. Ask the bank for a certified copy along with the statement of account. The deed determines the scope of your exposure and, crucially, what has been waived.

The second is to assess and document your genuine net worth position honestly. Banks assess guarantor net worth as part of the settlement arithmetic, and a guarantor whose position is materially weaker than the bank assumes has real negotiating room — provided that position is evidenced rather than merely asserted. Transfers of personal assets after default, on the other hand, invite avoidance proceedings and allegations that harden the bank's stance considerably.

The third is to negotiate the guarantee release explicitly in any corporate settlement. This is the moment of maximum leverage. Once the corporate exposure is settled and paid, the promoter has nothing left to trade and the bank has no reason to release a surviving claim.