Summary of this article
A guarantor can be proceeded against under the SARFAESI Act, 2002, jointly and severally, and liabilities are co-extensive with those of the principal debtor.
Banks can proceed against secured assets of the guarantor under the Act, including mortgaged immovable property or hypothecated assets.
In parallel, through the Debts Recovery Tribunal, or execution proceedings, they may target other attachable assets, such as bank accounts, investments, and movable property.
The recent ruling passed in Chuni Lal v. J&K Bank Ltd., has increased spotlight on guarantor exposure. The Jammu & Kashmir and Ladakh High Court stated that although pension is exempted from attachment before its payment, after being credited to a bank account, it loses its protection and becomes liable for attachment just like any other money, reaffirming the wide scope of powers for recovery available with banks.
It may be noted that in this case, the petitioner (a retired government employee) was receiving a monthly pension in his account with J&K Bank. The bank deducted Rs 4 lakh from his pension account because he had stood as a guarantor for a loan and the borrowers had defaulted. The petitioner argued before the J&K and Ladakh High Court that pension money is exempt from such recovery. The Court ruled that the pension amount cannot be seized so long as it is with the employer. However, once it is credited to the person's account, it can be attached.
According to legal experts, a guarantor can be proceeded against under the SARFAESI Act, 2002, jointly and severally, and liabilities are co-extensive with those of the principal debtor. This means the bank need not exhaust its remedy against the borrower first before proceeding against the guarantor.
“Normally, the process starts with the classification of the loan account as a Non-Performing Asset (NPA). Later the bank issues 60 days’ demand notice under section 13(2) of the Act to the borrower/guarantor. Later the bank can send a notice under section 13(4) the Act to take possession of secured assets from the borrower/guarantor, and auction the same if dues are not cleared. In compelling scenarios, where resistance is encountered, banks may seek assistance from the District Magistrate under Section 14 of the Act,” says Amit Kumar Nag, Partner, AQUILAW.
Significantly, however, the creditor's remedies are not exhausted in the Act. Under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), banks can file proceedings before the Debt Recovery Tribunal (DRT) to get a recovery certificate which can thereafter be executed by attachment and sale against a larger class of assets, both secured and unsecured. Usually, the remedy is invoked in aid of the Act only where there is an amount which remains due after enforcement of security.
“Furthermore, under the Insolvency and Bankruptcy Code, (IBC), creditors may initiate insolvency proceedings against personal guarantors to corporate debtors. This shifts the paradigm from asset to asset recovery to a collective resolution framework, where the guarantor’s entire financial position is assessed, potentially culminating in a repayment plan or bankruptcy order. The Hon’ble Supreme Court, has, time and time again, affirmed that such proceedings can run concurrently with actions against the principal borrower, reinforcing the independent and continuing liability of guarantors,” informs Nag.
Banks can proceed against secured assets of the guarantor under the Act, including mortgaged immovable property or hypothecated assets. In parallel, through the Debts Recovery Tribunal, or execution proceedings, they may target other attachable assets, such as bank accounts, investments, and movable property.
However, certain protections remain. “Under Section 60 of the Civil Procedural Code, 1909 (“Code”) assets such as basic household necessities, books of accounts, tools of trade, and statutory benefits like provident fund and gratuity enjoy protection. Additionally, agricultural land is generally excluded from enforcement under Section 31 of the Act,” observes Nag.
In contrast to this elaborate restitution system, the Code provides one failsafe to protect debtors and gives respite to the following, particularly non-exhaustible list of articles which have been exempted from attachment to ensure bare minimum decency and livelihood standards of life:
Utensils for domestic use and wearing apparel
Livelihood articles like tools, instruments etc. so that nobody shall be stripped of their livelihood
Journals and accounts
Provident fund, Gratuity, Pension (that too subject to changing judicial decisions)
Partial attachment of salary
Furthermore, Section 31 of the Act states certain exceptions – the biggest exception being Agricultural land. Enforcement actions are rarely made against agricultural land due to political and social reasons.
“To summarise, the legal framework provides a multi-pronged recovery setup, wherein the SARFAESI Act, RDB Act, and IBC work in different lanes, providing creditors with multiple remedies. At the same time, the Code and statutory exclusions serve as a counterbalance, ensuring that enforcement does not transgress into deprivation of basic subsistence or statutory entitlements,” says Nag.
The result is a system that is creditor-friendly in design, yet not entirely indifferent to the guarantor’s residual protections.
