Tuesday December 30, 2003
Still liable for debt
By BHAG SINGH
FOR a long time guarantors have felt aggrieved that banks, finance companies and other creditors take action against them when the person (debtor) who borrowed the money or purchased goods on credit or secured services fails to pay up.
They understand that if the creditor cannot get back their money from the debtor then, as guarantors, they must pay. But what irks them is that before taking all the necessary steps to compel the debtor to pay action against the guarantor is vigorously pursued.
In some cases some institutions pursue the guarantor vigorously while forgetting about the debtor at all or had even forgotten about the very existence of that debtor.
Therefore, it was a matter of great comfort for guarantors when they heard statements made in Parliament and elsewhere that creditors would have to pursue the debtor before proceeding against a guarantor.
Subsequently, a law has been passed to provide for this but how far does the law go to improve the position of the guarantors?
When the actual amendments to the law are looked at, the reality is that the changes are somewhat limited and the impact of these changes do not meet the expectation of guarantors.
To start with, the changes made are not aimed at “guarantors” generally but only in the context of bankruptcy proceedings. This, therefore, means that the position of the guarantor remains the same as before in the sense that an action can be filed against him/her with the action against the debtor.
Thereafter, judgement can be obtained against a guarantor and all the other means of enforcement can be pursued. These would include seizing and selling their property and attaching their other assets such as shares and bonds as well as seizing money in the hands of third parties.
Even where bankruptcy proceedings are concerned the changes only extend protection to the “social guarantor”. If a person is not a social guarantor the position remains as it always was on terms of exposure to bankruptcy.
A “social guarantor” means a person who provides not for the purpose of making profit, the following guarantees:
* a guarantee for a loan, scholarship or grant for educational or research purposes;
* a guarantee for a hire-purchase transaction of a vehicle for personal or non-business use; and
* a guarantee for a housing loan transaction solely for personal dwelling.
It will be seen from the definition that it limits considerably the scope of the words “social guarantor”. If a hire purchase transaction is entered into, then the guarantor is a social guarantor but not if a direct loan is taken to buy a vehicle. Nor is a person protected if the hire purchase is to acquire any other household needs apart from a vehicle.
Similarly, if a borrower had obtained an overdraft facility part of which he used for the purchase of a house and part of it for other purposes whether personal or non-commercial then the guarantor in such a situation may not be considered a social. guarantor either.
Even if all the earlier discussed requirements are fulfilled and a person falls within the definition “social guarantor” the prohibition is only against a creditor’s petition being filed against such a guarantor.
A petition creditor must have exhausted all avenues against the principal debtor before he may proceed against a social guarantor. At this point of time, it is difficult to say precisely what is meant by “exhausted all avenues” and its full legal implication will be explored in time to come.
The words “exhausted all avenues” to recover debts owed therefore creates a further ambiguity. It is not uncommon for a third party to have offered land or other assets as security for a loan given to a debtor. For this purpose, a charge may have been executed to secure the debt.
Though such a person is not formally described as a “guarantor” in the security documents such a person is indeed a guarantor or in a very similar position. Such a person is also clearly not protected by the changes in the law and his obligations remain unaltered.
Then, there is the issue of many guarantors in the loan documents executed who agree to be treated as principal debtors and to indemnify the lender. Thus many people believing to be “guarantors” end up assuming obligations greater than what a guarantor ought to have.
The result, therefore, is that the new law only prohibits bankruptcy action being pursued against a guarantor unless all avenues to recover the debt owed have been exhausted but does not prevent the creditor from pursuing other means of enforcement which in practice is just as bad for the guarantor. The meaning of social guarantor also has important implications.
The banks and financial institution now merely have to adopt other enforcement methods to go after guarantors as they have always done. Guarantors may be left with the hard reality that not much has changed after all.
2433 Views ⚫ Asked 6 Years Ago
asked on Feb 8, 2012 at 05:31
by BHAG SINGH
by BHAG SINGH
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answered on Mar 30, 2017 at 18:09
edited Apr 3, 2017 at 05:34
I have a query. You say if a hire purchase is entered into for a vehicle then the guarantor is a social guarantor. I'm a guarantor for a lorry my brother bought under a small company name he set up. He didn't take direct loan to purchase the lorry instead it was vehicle hire purchase loan where I'm the guarantor. Do I fall under social guarantor?
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