Legal Position relating to Guarantors in Corporate Loan in Bangladesh

In a lending scenario by a Company, usually, lenders require a personal guarantee from the directors of the company. A personal guarantee is a type of guarantee where one or more company directors personally guarantee to repay any debts of their business if the company face any financial crisis or unable to meet its financial obligation. A personal guarantee risks their own personal assets. A director’s personal guarantee may be used in many situations, including:

• Bank loan or overdraft applications
• Invoice financing arrangements
• Commercial property
• Trade supply deals
• Investment deals

The disadvantage of the personal guarantee is when the business unable to pay its debt, the personal guarantee becomes personally liable for it. This means that the company creditors can pursue personal guarantee and can put their personal assets at risk including home as well.

Legal Requirements for a Guarantee

Many documents are called guarantee but actually, they are not. There are a few factors which the court takes into accounts. These are:

• Proper interpretation
• Title of document
• Substance over a form.

There are a number of formal requirements to be a guarantee.

• Form of guarantees: it must be evidenced in writing in a formal contract or agreement, note, memorandum or promissory note.
• Signed: the guarantee or their authorized agent should sign it. The name must be written or printed, as long as it is operated as a signature.

• Secondary Liability: Establish that the guarantor has secondary liability to perform the guaranteed obligation. The principal debtor has primary liability.
• Consideration: the documents should satisfy the requirements of any contract. That means, offer and acceptance, contractual consideration, an intention to be legally bound and capacity to enter into the contract.

How long is a personal guarantee enforceable?

A guarantor’s liability is “coextensive” with the debtor. Whatever the debtor is liable for to the creditor, is the liability of the guarantor. If the debtor’s liability is released, so is the liability of the guarantor.

Demand Promissory Note:

Demand promissory note is a document whereby the borrower makes a promise to the banker to repay the loan amount on demand with the agreed rate of interest.

The Promissory Note Due on the Demand document if:

• You are making a loan to someone.
• You are borrowing money from a private party.
• You want to determine the amount of a monthly payment on a loan.

Mortgages vs. Promissory Notes

The homeowner generally thinks that their mortgage as an obligation to repay the money they borrowed to buy their own residence or property. But actually, they sign a promissory note, as part of their financing process. This document represents that promise to pay back their loan along with repayment terms. The promissory note is also another way where some people don’t qualify for a mortgage, they also can purchase a home. 

Name of the Guarantor may appear as the guarantor only in the CIB report

In the case, Anwar Cement Ltd vs. Bangladesh Bank and others, the Division Bench of Hon’ble court presided over Justice Jinat Ara passed a Judgment and order dated 24.04.11.  It is stated in this case that the in the CIB report of Bangladesh Bank the name of the guarantor may appear in the CIB report as a guarantor only and not as a defaulting borrower.

However, in the previous case law refers that the guarantor’s name cannot appear in the CIB report at all is hereby overruled. Article 43 of Bangladesh Bank Order 1972, as well as CIB circulars 01/1994 inserting someone’s name in the CIB report, does not automatically mean that it is classified as defaulting borrower as per the provisions of section 27(kaka) of Bank Company Ain 1991.

Sec 17(1) of the Banking Act 1991 stated that consequences of default of payment by the directors-Directors of the default loanee are vacated on the expiry of the period of two months notwithstanding the subsequent rescheduling of the loan and repayment of ten percent of the outstanding loan.

In the case Major MonjurQuadar (Reted) V Bangladesh Bank, it stated that in section 27 Kaka of the Bank Companies Act, 1991 came into force when the petitioner was neither a shareholder of the company nor a Member of the Board of Directors of the borrower company, his share having been validly transferred prior to that date, he is only liable for repayment of the loan by virtue of his personal guarantee to the bank. As stated in our judgment in Writ Petition No. 3931 of 2001, a guarantor’s liability will not attract the provisions of section 27 Kaka of the Bank Companies Act, 1991 and, as such, the petitioner’s name cannot be included in the CIB list.

Recovery Policy

The recovery process can be divided in two ways. Pre-legal way and the Legal way. Pre-legal way of recovery is done by the banker himself and legal way of recovery is done with the help of court/law. 

We have to keep in mind that the bank’s money is public money.  It’s a common responsibility for the borrowers to repay the borrowed money within the due time, simultaneously, as it becomes the responsibility of all the bankers to recover the money within the due date. One of the main reasons for which lending money become stuck up is lack of monitoring. Generally, start the recovery process after a loan becomes stuck-up. But this is a totally wrong process. Recovery should be started from the date of disbursement of the loan. Proper monitoring of loan can prevent it from being classification. Account transaction of the loan account of the borrower must be monitored. Following subjects may be monitored in case of a continuous loan account.

1.  The transaction must be in conforming with the business of the borrower. If any suspicious transaction seems to have happened, clarification regarding the transaction must be obtained from the borrower. Un-related business transaction indicates that the borrower diverts the fund elsewhere.

2.  Big amount of single withdrawal by the borrower must be monitored. If it is not conforming with the business nature of the borrower, the loan must be called back.

3.  Lowest balance of the continuous loan account must be monitored after a regular interval. If the lowest balance is always high it indicates that the borrower may block a certain amount which he is not getting back. This is not good for the future of the loan.

4. Stock position, as well as receivables, must be matched with the outstanding balance of the loan account. If the stock is found less than the outstanding balance then it indicates that either borrower has diverted the fund elsewhere or he has bad debts which are a bad sign for the bank loan.

Visit the client on a regular basis even if his payment is regular. In the case of the business client, borrower’s business house, factory, the stock has to be visited on a regular basis to see whether everything is going on perfectly or not. When a loan will be monitored in such a way, a borrower will remain alert to repay the loan and bankers will also be relaxed to know the actual position of a loan

Bank may give an early reminder to their client before the due date in a very gentle way. An early reminder may be given by SMS, Email, letter or even by phone call. If any borrower misses the due date a further gentle reminder may be given to the client. If any borrower fails to repay the dues and does not respond after a reminder, bankers must visit the client’s office or house to physically meet with him to recover the money. If necessary, visit the guarantors for recovery of the money.

If the bank has any pledge/hypothecated goods under control against any loan, the bank may take possession of the goods and arrange to sell the goods through auction towards adjustment of the liabilities. If Bank has any mortgaged property against any loan and if a bank takes the power of Attorney u/s 12 of Artha Rin Adalata Ain to sell the property, the bank may arrange auction to sell the property without the intervention of the court through an auction sale. This is the last step of Pre-Legal way for the recovery of the loan.

When a borrower fails to adjust the loan and a loan becomes classified or going to be classified or become stuck-up due to acceptable reasons, in that situation bankers have some option to reschedule/restructure the loan for a certain period of time (as per rule of central bank) to assist the borrower to repay the loan. Bankers should use this option for the borrowers who are not a willful defaulter and who are willing to repay the loan.

Training is important for the person who will be involved in the recovery process. Capacity building of the officers is very important. Try to involve efficient officers in the recovery team who can exert their professionalism to recover the money. Bankers must be professional while recovering the money. Bankers must behave professionally with the borrower in a polite manner while recovering the money. Never be rude with the borrower and be friendly while recovering the money.

Involvement of high official in recovery process directly is another important task. Though all the Banks have a recovery department headed by a divisional Head but the top management of the Bank must be involved in the matter directly which will help accelerate the recovery process. The necessary authority must be given to the recovery manager so that he can give any decision to the defaulted borrower in a shortest possible time or instantly. Sometimes recovery of money may be jeopardized due to a lack of proper and timely decision.

CONCLUSION

In the conclusion, we can say that when the business unable to pay its debt, the personal guarantee becomes personally liable for it and the company creditors can pursue personal guarantee and can put their personal assets at risk. There are a number of formal requirements to be a guarantee. Form of guarantees, Signed, Secondary Liability and Consideration.

When the guarantor/ borrower takes a loan from the bank they need a document named promissory note. This document states that the borrower makes a promise to the bank to repay the loan amount on demand with the agreed rate of interest. Sec 3(1) of the Bank Company Ain, 1991 stipulates that when providing loans & advances and other financial facilities to bank directors, their relatives & their affiliated entities like loan limit, loan approval and prior approval by Bangladesh bank.

The case Anwar Cement Ltd vs Bangladesh Bank and others, it is stated that in the CIB report the name of the guarantor may appear in the CIB report as a guarantor only and not as a defaulting borrower. However, in the previous case law refers that the guarantor’s name cannot appear in the CIB report at all is hereby overruled. This means that the name of the guarantor may appear in the report as guarantor and not a borrower.