Liability of a guarantor is coextensive with the principal borrower and under SARFAESI Act, 2002, bank or a financial institution could proceed against the guarantor as well.
There is no rule as to whether the properties of guarantor or the principal borrower should be sold first, although a guarantor can allege mala fide intentions, favouritism and arbitrariness against the bank if it’s a nationalised bank. However, that may have little prospects of success.
Ideally, what should be looked at is the provisions of SARFAESI ACT, 2002 and whether they are properly complied with or not.
Firstly, a guarantor should ask for copies of all relevant documents including copy of title deeds of any property mortgaged, the loan agreement with the borrower, account statement of principal borrower etc.
Things to check are:-
1. Whether the account is properly classified as NPA? The definition of NPA under the Act is :- ““non-performing asset” means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, 2 [doubtful or loss asset,— (a) in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body; (b) in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank];”
Normally for default in repayment of term loan, the account becomes NPA in 90 days in terms of RBI Guidelines. RBI guidelines for classification of account as NPA however differ in respect of different kinds of loans. For example, the period for classification of account as NPA in connection with agricultural loans is linked to the duration of a given crop getting its first harvest.
So firstly, check for whether the account is properly classified as NPA in line with RBI guidelines.
2. Whether 13(2) notice demands the amount pursuant to recall of loan which otherwise may have been payable over a longer tenure and if so, whether recall is proper in terms of RBI guidelines and the agreement with borrower and whether any intimation/ notice was given to guarantor for such recall of facility?
3. Whether 13(2) notice is given by the authorised officer as defined under The Security Interest (Enforcement) Rules, 2002?
4. Whether the notice gives full details of property sought to be taken over and the amount payable is mentioned in the notice. As is interpreted by judicial pronouncements, “full details of amount payable” includes total amount with account statement containing details of each credit and debit entry and anything short of that may fall foul of the provisions of s.13(3) of the Act.
5. Whether are there any discrepancies in the account statements shared by bank?
6. Also it may be examined that whether mortgage deed etc. made for property concerned and agreement for that purpose is duly stamped, lest such document may be liable to be impounded and may not be admissible as evidence for any purpose whatsoever.
7. It also may be examined whether the guarantee deed is proper and whether bank itself has acted in line with the terms of the guarantee deed, lest such a guarantee deed could be challenged.
Upon examination of above and other issues, a representation u/s.13(3A) could be made to bank which normally would be rejected and then on ground of rejection, one could approach DRT u/s.17 of SARFAESI Act, 2002 or in appropriate cases, one could approach the jurisdictional High Court for stay; one of the instances where High Court could be approached directly despite availability of alternative remedy before DRT is when account is wrongly classified as NPA and in such an eventuality, the classification of account as NPA itself could be challenged before High Court.
Alternatively, another course of action will be to wait for bank to file an application u/s.14 before the magistrate and oppose application on above objections in such proceedings followed by challenge u/s.17 before DRT to any action for possession of property. In Proceedings before the CMM/ DM, whether the account statement produced by the bank from a computer meets with requirement of s.65B of Evidence Act will be an additional ground for opposing such application.
