Q.4 Define guarantee, what are the main precautions before accepting guarantee?
Guarantee as security for banker’s advances arises only when borrower is not able to satisfy the banker of his credit worthiness. The person who gives the guarantee is called guarantor, the person who borrows the money is called principal debtor and who accepts the guarantee is called creditor. There are two types of guarantees, one is specific and other is continuing. If the guarantee is for specific loan then it will be called specific guarantee. If guarantee is for whole transaction and payments carried out by the debtor then it will be called creditor.
CHARACTERISTICS OF GUARANTEE
Following are the main features of the guarantee.
There are three parties involved in a guarantee, Creditor, debtor and guarantor.
Basic liability of payment of debt falls on the debtor. If he fails to pay then responsibility falls on the guarantor.
Creditor and debtor have interest in the contract but guarantor has no interest in the contract.
ELIGIBILITY OF GUARANTOR
Any person or firm who is eligible to do the contract can become a guarantor but in the following cases banker must be careful in accepting the guarantee.
- Minors and unsound minded person cannot become a guarantor.
- A married woman is not considered a free agent. She can only contract against her separate property.
- Normally registered companies can borrow the loan but have no power to become a guarantor. If the firm is authorized then it is possible.
- In case of partnership a single partner cannot become the guarantor. If such powers given by all the partners to anyone then it is possible, otherwise all the partners should sign on the deed.
DIFFERENCE BETWEEN GUARANTEE AND INDEMNITY
- Contract of guarantee requires written evidence while in contract of indemnity there is no need of written evidence.
- In case of indemnity there is one contract of liability while in case of guarantee there are two contracts.
ADVANTAGES OF GUARANTEE
- It is very easier security as compared to mortgage of property.
- It gives maximum protection to the lender.
- The sign can be easily obtain from the guarantor on the form, given by the bank and there is no need of preparing deed. ,
- The banker may call guarantor and tell him about the default of debtor.
- By a simple court action a guarantee can be enforced.
- In case of default a banker and guarantor both pressurize the borrower to repay the debt.
DISADVANTAGES OF GUARANTEE
- If the guarantor’s property is destroyed or sold during the period of contract and borrowing also fails to pay the debt. In this case it is very difficult to recover the amount from both the parties.
- Sometimes if the bank changes the constitution then guarantee is terminated.
- Sometimes the loan is not returned and bank claims in the court against the guarantor but it is rejected on technical ground.
- In case of amalgamation with other banks the guarantee is terminated.
Keeping in view the above facts we may say that its importance cannot be ignored.
PRECAUTIONS BEFORE ACCEPTING GUARANTEE
- The banker must get the guarantee signed by the guarantor in his presence. He should ask customer and guarantor to attend together to complete the documents.
- To banker should accept the guarantee of the person who is sound minded and adult. He should also check the legal capacity of the guarantor.
3. WITHOUT PRESSURE
Without any pressure, guarantor should give guarantee. The bank should also analyse this type of situation. If any guarantor has been pressurized then the banker may not accept it.
4. PERSUATION BY CUSTOMERS
The bank er should not ask any person for guarantee.
5. FACTS MAY BE EXPLAINED
The banker should explained all the material facts regarding the debt, and guarantee. Any type of mis-representation is invalid. So a banker should not conceal any fact from the guarantor regarding the risk he has to undertake.
6. CONTINUING GUARANTEE
A banker should always insist upon obtaining a continuing guarantee instead of specific guarantee. Relate a story or paint a descriptive https://pro-essay-writer.com picture.
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