The Hidden Pitfalls of Personal Guarantees by Promoters

Personal guarantees by promoters have become a standard requirement for securing loans from banks and financial institutions in India. However, what many promoters fail to realize is that signing a standard, non-negotiated personal guarantee can completely undermine the protections afforded to them under the Indian Contract Act, 1872. If not carefully

negotiated, the standard clauses imposed by banks can leave promoters with unlimited liability, exposing their personal assets without recourse.

Do Not Contract Out of Your Standard Rights

The Indian Contract Act provides certain in-built protections to guarantors. For instance, Section 133 to 139 outline how changes in the contract, non-disclosure of material facts, or creditor misconduct can discharge a guarantor’s liability. However, banks typically insert clauses in personal guarantees that effectively override these rights.

By agreeing to these clauses without negotiation, promoters unknowingly waive important defenses. The result? If the borrower defaults, the bank will enforce the guarantee without considering whether all conditions precedent to liability have been met. This means that even if the primary debtor’s liability is reduced due to restructuring, settlements, or misconduct by the lender, the promoter may still remain fully liable.

Promoter Personal Guarantee: A Direct Path to Personal Asset Attachment

One of the most significant implications of signing a promoter personal guarantee is that it directly impacts the promoter’s personal assets. Unlike corporate guarantees where liability is often limited to corporate assets, a promoter’s personal guarantee makes them individually liable. Before your personal assets are distributed, your creditors will have the right to claim them. This means that your home—whether solely owned by you or jointly held with your spouse—can be at risk. Your savings, investments, and even inheritances could be exposed to creditor claims.

The Insolvency and Bankruptcy Code (IBC), 2016 has further solidified this position. Under the IBC, banks can initiate insolvency proceedings against personal guarantors independently of the borrowing entity. This means that even if the company undergoes restructuring, the promoter can still be personally pursued for repayment, making the guarantee a ticking time bomb.

The Emotional Cost: Your Family Left Unprotected

A lifetime of hard work, savings, and wealth accumulation can vanish in an instant if a promoter fails to plan ahead. In the unfortunate event of an untimely death, without proper estate planning, the promoter’s family—his wife and children—will not have first rights over his assets. Instead, the creditors will step in first to take their pound of flesh, leaving the family vulnerable and potentially destitute. The very assets built to secure the future of loved ones could be seized to settle debts, leaving behind financial uncertainty and emotional turmoil for those left behind.

Negotiation is Key

Before signing a personal guarantee, promoters must:

• Understand the scope of liability: Ensure that liability is limited in time, amount, and scope.

• Negotiate a cap: Fix an upper limit on the guarantee amount.

• Include release provisions: Demand automatic release upon loan repayment or upon dilution of promoter shareholding.

• Seek indemnity protections: Insist on indemnities in case the lender’s actions cause unnecessary liability.

• Review the subrogation rights: Ensure that once a guarantee is invoked, the promoter has the right to recover from the company.

Personal guarantees are not mere formalities—they carry significant legal and financial risks. Promoters must resist signing one-sided standard bank guarantees that strip away their contractual protections. Most importantly, they must recognize that before their personal assets are distributed, their creditors will have a right to claim them—including their home, whether owned individually or jointly with a spouse. This fundamental risk should never be overlooked.