Bank Can Recover Loan Dues From Guarantor Without First Chasing The Borrower: Allahabad HC

The Allahabad High Court has clarified that a lender does not have to first recover a defaulted loan from the person who borrowed the money before turning to the guarantor.

According to a PTI report, Vineet Pandey and Anoop Kumar Mishra had provided guarantees for loans taken by their colleague Vikrant Dubey, from the UP Postal Primary Cooperative Bank in 2022-23 through three separate loans. These comprised a festival loan of Rs 50,000, a short-term loan of Rs 3 lakh, and a personal loan of Rs 18 lakh.

Following the default, the bank started recovery proceedings. It also sought monthly deductions of Rs 10,000 from the salaries of Pandey and Mishra through the Postal Department.

The two guarantors challenged the move before the high court. Their argument was that the bank should first attempt to collect the outstanding money from Dubey. They also argued that the guarantors could be pursued only for any balance left after recovery from the borrower.

Guarantor’s Liability

The bench of Justices Shekhar B Saraf and Abdhesh Kumar Chaudhary rejected this interpretation of a guarantee.

The court referred to Section 128 of the Indian Contract Act, 1872. This provision states that the guarantor is accountable for the same debt as the borrower unless the guarantee agreement says otherwise. The creditor is not required by law to adopt a particular sequence by approaching the borrower first and the guarantor later.

The court found that loan due recovery action against the guarantors could take place alongside action against the principal borrower.

Guarantee Terms Can Change The Position

The Bench also examined whether the agreements signed by the petitioners placed any restriction on when the bank could demand payment from them.

It found no clause in the guarantee agreements that required the bank to first exhaust its remedies against Dubey. There was also no provision deferring the guarantors' liability until the borrower had failed to meet a further recovery demand.

The absence of such a condition meant the bank could invoke the guarantees and seek payment from the two petitioners.

Guarantors Can Seek Recovery From Borrower

The court, however, pointed out that a guarantor who pays the borrower's dues is not left without legal remedies.

After meeting the liability, the guarantor can seek appropriate relief against the principal borrower through rights, such as subrogation or contribution. These rights, however, do not give the guarantor grounds to prevent the lender from enforcing the guarantee.

The court consequently upheld the bank's decision to seek Rs 10,000 a month from the salaries of Pandey and Mishra and dismissed both petitions.