Five rights of guarantor against creditor

Five rights of guarantor against creditor :-
By Advocate M V Kini
a) Requiring the creditor to call upon the Principal Debtor also along with the Guarantor to pay off the due debt.
b) Available facilities of set off (if any) before payment to the creditor, when sued.
c) By paying off the debt, entitled to be subrogated to all the rights of creditor against Principal debtor including access to securities.
d) Paying off the due debt to the creditor voluntarily.
Three rights of guarantor against debtors:-
Once the debt is paid off the guarantor steps into the shoes of the creditor and entitled to be reimbursed by the Principal debtor.
b) Entitled to ask the Principal debtor to relieve him of his obligation.
c) Entitled to ask the Principal debtor to have him relieved of his future liability by giving similar notice to the creditor.
The liability of a guarantor is crystallized and determined by
i) Giving specific notice as required (ii) death/insolvency/Lunacy. In all these cases, it involves stopping of the account and initiating appropriate steps to enforce the guaranteed amount.
ii) “Ultra Vires” borrowing i.e. borrowing beyond the powers of the Company or beyond the powers of the directors, as the case may be, does not have the effect in law, of creating a debt-legal or equitable and any instrument, executed or security given for this purpose is void. Even if a resolution is duly passed at a meeting of the Board; directors’ borrowing for “Ultra Vires” purposes being beyond the powers of the board and of the company in general meeting- it will not bind the company. Hence due care must be taken by the lending Bank that the aggregate limits to the company is well within its borrowing ceiling.
iii) The Bank is supposed to have constructive notice of Memorandum & Articles of Association of the Company. The Bank is bound to read these registered documents and to see that the proposed dealings are apparently regular and consistent with the provisions contained in Memorandum & Articles of Association of the Company. But they are not bound to do any more and need not enquire into the regularity of internal proceedings of the company. The doctrine of indoor Management lays down that strangers dealing with the company are entitled to assume that the required procedures as per the Articles of Association have been followed. If the company wants to borrow beyond the limits specified in section 293(1)(d) then company will have to seek the approval of general body.
iv) “Lien” (Sec-171) is the right of the creditor to retain property belonging to the debtor until a debt due from the latter is paid. A banker’s lien is a general lien and also treated as an “implied pledge”. It attaches to such securities as a banker ordinarily deals with in a relationship of creditor –debtor. An express contract between the banker and his customer creating a lien would exclude operation of the statutory general lien. When a banker has a lien liquidating the debt, even though an action thereon would be time barred. The law of Limitation is to bar the remedy but not to discharge the debt. That means if any legal proceedings are not taken against the Borrower/Guarantor, within 3 years of last entry in the A/c or the last date of Acknowledgement of Debt, you cannot file a suit thereafter. But that does not mean, the Borrower/Guarantor is free from the Debt. If there is any mode of recovery, without filing suit, Bank can recover the amount due, say by right of General lien by the Bank.
(v) “Set-off” is a right in the hands of the banker to combine various accounts of a customer held in the same right. Set-off poses no problems in a situation which is determined e.g. death, bankruptcy or where a letter of set-off is held, but in an ongoing situation, a banker must exercise great care especially when the question of dishonour of cheques is involved. As wrongful dishonour could cause the bank heavy loss over and above the amount of the cheque returned. While drafting security Agreements, due care must be taken to ensure that the right of General Lien and set off are incorporated in the Agreement itself, though even under Contract Act the Bankers have a right of General Lien.