Ridhima 05 May 2016

Personal assets of guarantor exclude proprietorship assets?

Hi all. We have a case wherein a person 'A' served as a Director in a public limited company, and gave his personal guarantee (along with other Directors) to take a loan from an NBFC, in 1996-97. The loan was secured by the company's assets, and A also pledged his company's shares, to the NBFC.

The company defaulted on the loan, around 2000-01. The NBFC sued the company, and sold off the secured assets (and recovered rs. 27 crore) vs the initial amount of rs. 15 crore, under the SARFAESI act. The NBFC has also kept the shares pledged by A.

This case is before the DRT for several reasons. But we are mainly concerned with A, the guarantor, who resigned from the post of Director in 2014. In the case filed before the DRT, his name is included, as it is a norm to sue the guarantor with the principle debtor. There are chances that A might be asked to submit a list of his personal assets to the court.

Also, A has given loans to the company several times, and the company owes him rs. 50-60 lacs.

A's personal assets are mainly his house (2 floors in a building), one floor which he owns and which he is planning to gift to his daughter on account of marriage. The other floor is inherited by his wife from his mother. And he is running a proprietorship business (completely separate from the company), which includes his factory. In this case, we would like an opinion on the following points-

1. Proprietorship firm's assets are business assets. Can they be attached to fulfil a personal guarantee?

2. Can the gift given to daughter be challenged in any way?

3. Is there any method of getting out of the personal guarantee? As he is not a Director anymore and the recovery by NBFC is more than the initial amount (though the final order would add interest to the initial amount). From the limited information we have, the NBFC's NPAs were nil in their Balance Sheet.

4. What can we do about the shares which are kept by the NBFC?

Thanks to everyone in advance

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4 Replies

SIVARAMAPRASAD KAPPAGANTU (Retired Manager) 05 May 2016

1. Proprietorship firm's assets are business assets. Can they be attached to fulfil a personal guarantee?

Answer is Yes. There is no difference between Personal property and Proprietorship firm property, unless the Propritorship property was already pledged/hypothecated or mortgaged to some other debtor before the personal guarantee to NBFC.

2. Can the gift given to daughter be challenged in any way?

You mean gift given after giving personal guarantee to NBFC. The gift may not be valid as it is apparently to avoid the named asset being proceeded against as part of the liability under Personal Guarantee.

Presently not the guarantor is not a point. Once he was and he gave his personal guarantee. He is liable for the liabilities for which he had given his personal guarantee. If the liabilities are not linked to the personal liability, the answer is no.

4. What can we do about the shares which are kept by the NBFC?

Depends upon whether the liability that has to be honoured under personal guarantee was already paid or not.

G.L.N. Prasad (Retired employee.) 05 May 2016

Director, while offering guarantee must have stated his assets and liabilities through a statement, and in addition Bank can engage private detectives to investigate other assets if any in the name of director. The guarantor is equally liable for the debt of the company whether he is a director or not.

Ridhima 05 May 2016

Thank you Mr. Sivaramaprasad and Mr. G.L.N. In this respect, I would like to clarify that A had not given a statement on his assets and liabilities to the NBFC as such, but has given the business Balance Sheets for the proof of income. And his proprietorship business has been running for close to 30 years, and has several employees and is also his main source of income. If the court attaches itself to the property, it would affect the employees, suppliers and buyers who depend on this business. So there is a strong third party interest. Also, the factory was clearly purchased in the firm's name. It is being shown in the firm's balance sheet and depreciation is being claimed. It is not a personal asset, but a business asset. Wouldnt personal guarantee cover only personal assets? The income from the business would be a personal income and can be used to pay the obligation.