Borrower Defaults, Can The Bank Recover Everything From Guarantor?

Prayagraj: The Allahabad High Court has ruled that a bank can recover unpaid loan dues directly from a guarantor when the main borrower defaults.

The bank does not have to first complete recovery proceedings against the borrower before taking action against the guarantor, the court said.

Recovery Rights

A Lucknow bench of Justices Shekhar B Saraf and Abdhesh Kumar Chaudhary said the guarantor’s responsibility is equal to that of the principal borrower.

This means a lender can recover the entire outstanding amount from the borrower, the guarantor, or both at the same time.

The ruling came while the court dismissed two separate petitions filed by Vineet Pandey and Anoop Kumar Mishra.

Both had acted as guarantors for loans taken by their colleague Vikrant Dubey from UP Postal Primary Cooperative Bank Ltd.

Salary Deductions

Dubey had taken three loans during 2022-23: a festival loan of Rs 50,000, a short-term loan of Rs 3 lakh and a personal loan of Rs 18 lakh.

After Dubey failed to repay the loans, the bank began recovery proceedings. It also asked the Postal Department to deduct Rs 10,000 each month from the salaries of both guarantors.

The guarantors argued that the bank should first recover the money from Dubey. They said the bank could approach them only if some amount remained unpaid.

They also claimed that recovering money from the borrower and guarantors at the same time was not legally allowed.

Court’s Decision

The court rejected these arguments, citing Section 128 of the Indian Contract Act, 1872.

It said a guarantor’s liability is equal to the borrower’s liability unless the guarantee agreement specifically says otherwise.

As the agreements contained no condition delaying the guarantors’ responsibility, the bank was legally allowed to make monthly salary deductions.

The court said there was no fixed order requiring the lender to first act against the borrower.

However, after paying the bank, the guarantors can legally seek repayment or contribution from the principal borrower.

The bench upheld the monthly deduction of Rs 10,000 and dismissed both petitions.