Bank Can Recover Loan Dues From Guarantor After Principal Borrower Defaults Hc

LUCKNOW The Lucknow bench of the Allahabad high court has held that a bank can recover loan dues from a guarantor after the principal borrower defaults, saying the creditor is not legally required to first exhaust its remedies against the main debtor before proceeding against the guarantor.

It ruled that the liability of a guarantor is co-extensive with that of the principal debtor and the creditor can proceed against either or both simultaneously.

A division bench of Justice Shekhar B Saraf and justice Abdhesh Kumar Chaudhary passed the judgement on August 6 while dismissing two writ petitions individually filed by Vineet Pandey and Anoop Kumar Mishra, who had stood as guarantors for loans taken by their colleague Vikrant Dubey from the UP Postal Primary Cooperative Bank Ltd.

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

After he defaulted, the bank initiated recovery proceedings and also asked the Postal Department to deduct ₹10,000 every month from the salaries of the two guarantors.

The petitioners argued that the bank should first recover the dues from the principal borrower and could approach the guarantors only for any residual amount.

They argued that simultaneous recovery from the borrower and guarantor was impermissible.

Rejecting the argument, the court relied on Section 128 of the Indian Contract Act, 1872, which provides that a surety’s liability is co-extensive with that of the principal debtor unless the contract of guarantee provides otherwise.

The court said this means the guarantor is liable for the whole amount for which the principal borrower is liable and that the liability is joint and several. Therefore, the creditor may proceed against either or both, it added.

Holding that there is no hierarchy of remedies requiring a creditor to proceed against the principal borrower first, the bench said as the guarantee agreement contained no condition postponing the guarantors’ liability, the bank was entitled to recover the dues through monthly salary deductions.

The court also held that the petitioners could pursue remedies of subrogation or contribution against the principal borrower after discharging the liability, but could not restrain enforcement of the guarantee.

Holding the recovery of ₹10,000 per month legally sustainable, the bench dismissed both writ petitions.