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Commercial

Banking

Advances
Advance Against
Guarantee
Guarantee is an undertaking given
by a person or an organization to
be answerable for the debt or
default of another person or
organization.
A contract to perform or
discharge the liability of a third
person or organization in case of
Guarantee as security for
banker’s advances arises
only when the borrower is
not able to satisfy the banker
of his credit worthiness.

Banker will not ask for
guarantee if acceptable
collateral securities are
provided to the bank
Guarantee may be specific or
continuing.
When the guarantee is specific the
guarantor is answerable for a
particular loan only.
When the Guarantee is continuing
the guarantor shall promise to pay
whole or part of all the transaction
carried out by the debtor.
Characteristics of Guarantee

Three Parties

There are three parties in a guarantee.

1 Principal Creditor
2 Principal Debtor
3 Guarantor
Primary Liability of Principal
Debtor
The primary liability to pay
the debt falls on the
original debtor. The
guarantor will pay only
when the principal debtor
fails to pay whole or part
of the agreed debt.
Guarantor has no interest in the
contract entered
The guarantor is answerable
for the loan if the debtor
default. He has no interest in
the contract between the
principal creditor and the
principal debtor
Capacity to Contract
The persons or firms who are able to make
contracts may stand as surety for loans.
Minor or unsound mind are not eligible
Married women have capacity to
contract only against her separate estate
Banker avoid accepting guarantee of
married women as they are not
considered a free agent after marriage
Registered Companies
The bank should avoid accept guarantees
of registered companies as they are
implied power to borrow but not normally
have indirect power to stand as surety.

The trading firm can ent3er into a
contract of guarantee provided It is
expressly authorized by its memorandum
and articles of association to do so which
is very rare
Partnership Firms
A partner has no direct power to enter
into a guarantee and this bind his co-
partner unless he has:
2. Definite authority of his co-partner
to give guarantee
3. All the partners sign the guarantee
deed
4. Standing of surety is a part of the
ordinary business of the firm.
Contract of Guarantee and
Contract of indemnity.
In Indemnity Contract the indemnifier
promise the party to save it from loss
caused to him by the conduct of the
promiser.
2. The main difference between the two is
that in case of guarantee there are two
contracts
3. whereas in a contract of a guarantee
there is only one contract of liability.
4. Contract of Indemnity does not require
written evidence.
Disclosure of Material Fact
• The banker is not under any legal duty to provide to
the intended guarantor any information regarding
the debtors dealing with him.
• If the guarantor ask the principal creditor about the
financial position of the debtor or the matter
connected with the transaction, the creditor must
give a straightforward reply without covering up of
material fact.
• If the debtor with the active involvement of the
creditor misrepresent the fact to the guarantor the
guarantee will be considered as invalid.
Joint & Several Guarantees
If more than one person co-operate
in giving of a guarantee the
guarantor will be answerable for
the debt depending on the
agreement in
• Jointly
• Separately
• Jointly & Separately both
Joint Guarantors
 In joint guarantor each guarantor is
personally liable for the payment of the
whole amount but the principal creditor
is to sue all the guarantors together.
 If action is taken against one guarantor
of joint then the other is free from all
obligation as cleared by principal
creditor.
 In case of death of any guarantor the
assets are liquidated of disease to pay
off.
Separate or Several Guarantors.
 If the guarantee is separate or several
the creditor can sue each of the grantor
for the whole liability separately.

 In case of death or bankruptcy of a
several guarantor their assets are not
released from liabilities for claims
arising before the death or bankruptcy
Joint and Several Guarantors
 When the guarantee is joint and several
the creditors can sue the guarantors either
jho9intly or separately until the debt is
fully recovered.
 The guarantor who dies or is declared
bankrupt remains liable for the advances
as in define above.
Termination of Guarantee
The guarantee of a person or firm Is
automatically revoked.

When the Debtor Pays off the Debt
When debtor makes payment of
the loan to the creditor
guarantee is automatically
terminated as the principal
contract stands cancelled.
Death of the debtor
If the principal debtor dies the
guarantee automatically ceases
to exist. The standing loan of the
deceased has however to be paid
by person who are incharge of
the assets. In case the loan is not
paid the guarantor shall have to
honor the obligations
Notice of Lunacy
If the bank receives notice of the
mental illness of the nonpayer or
surety the operation of the account
shall have to be stopped
immediately by the banker
Any amount advanced after the
receipt of the notice of the mental
illness of the guarantor shall not be
recoverable from the assets of the
lunatic incase of default both the
principal debtor
Notice of Debtor’s Bankruptcy
If the bank receive a notice actual
or constructive of the debtors
bankruptcy the operation of the
guaranteed account should
immediately stop. The banker
can demand the amount from
the guarantor which was due
from the debtor.
Change of the Constitution
of the Firm

If there is a change in the
constitution of the firm due to
say the death of the prater or
the expulsion or retirement of
the prater the future liability of
the guarantor shall stand
discharged
Death of the Guarantor
The guarantee unless otherwise
predetermined shall stop to operate
when the notice is received about the
death of the guarantor.

In case of the assts of deceased several
and joint guarantor alive the assets is not
release from liability.
Unauthorized difference of Terms

If the principal creditor and
principal debtor differ with the
terms of loan contract without
the consent of the guarantor the
guarantee is automatically
revoked unless otherwise agreed
Release of Securities by the
Creditors
If the principal creditor release
the secretaries pledged with him
as cover for loan without the
consent of the guarantor the
guarantee unless otherwise
agree is terminated for all future
advances
Creditor conflicting with the
rights of the guarantor
If the creditor does not safeguard
the interests of the surety which
he could reasonably do the
liability of the guarantor is then
discharged.
Unauthorized Extension of time to
the debtor
If the creditor without the
consent of the surety grants
extension of time to the
debtor or agrees to receive
part payment of the loan or
promises the debtor can not
sue him the guarantee is
revoked.
Amalgamation of Banks

If two or more bank
amalgamate the guarantee
will cease for all future
transactions unless there is
an agreement to the contrary
Obligation of the Bankers
1. No change in the contract between debtors
and creditors without the knowledge of the
banker and its approval. In case of any change
in the agreement is made without the bankers
consent the agreement will stand revoked.

2. The bank cannot bring alteration in the
contract by releasing of a guarantor of his
liability as it affects the liability of the
remaining co sureties
If the principal debtor is
unconditionally release by the bank it
automatically involves the release of
the guarantor. The bank should not
take the risk of releasing principal
debtor unless there is a provision of
reserving right against the surety in
the agreement
The bank should not give e back
the securities to the principal
debtor till the loan is repaid as
that directly affects the interest of
the surety. |The relinquishing of
securities revokes the agreement
unless the condition are changed
in the contract.
The banker unless clearly or
directly sanctioned, cannot treat
to the debtor for extension of time
for the payment of debt or
agreeing not to sue the principal
debtor.
Advantages of Guarantees and
securities for advances
 Guarantee as security give maximum
protection of the debtor being insolvent.
 The bank on its guarantee from can easily
obtain signature of the surety and thus
complication of mortgaging the property is
avoided
 The bank can enforce a guarantee by a
simple court action.
 The mortgaging of land or other movable
property as a cover for loan involves a
chain of documents and obstacle.

 The bank can call the surety by telephone
telegram or by a simple letter and can
appraise him of his liabilities. In case the
principal debtor hesitate to meet the
obligations
Disadvantages
 The bank undertake great risk by advancing
loans on sureties.
 The guarantor may lose all his property during
the period of loan contract .
 If the debtor fails to pay the debt then the bank
cannot recover the amount from the two
parties.
 Incase the debtor fails to repay the loan the
bank may not be able to get back the money
even by suing the debtor the guarantor. The
case may fail on technical ground
If at any time the bank has to change the
constitution or its has to amalgamate with
the other banks the guarantee is
terminated unless otherwise stated.

END