“Do Bank need a Guarantor to sanction loan?” is the question I ask when people come to me asking to be their guarantor.
On the morning of 27 June 2016, exactly at 7:50 PM, Ms. Dechen Dechen (Facebook profile name) has posted (in Facebook) a beautifully written piece titled “Open Letter to my Lost Friend”. How beautifully she has put it. Incredible. Her letter not only invites social media to help her find whereabouts of her lost friend but also regret for her grave mistake by putting herself into the shoe of a surety. Similar cases are abundant in the Bhutanese business market but only few are uncovered.
With the economic growth and development, financial borrowings and investments are increasing. Thousands of customers visit the financial institutions, and numerous financial transactions take place daily. Both the banks and customers signs various legal documents, knowingly or unknowingly. The Contract of Guarantee is one major document being signed without understanding its legal obligations.
What do Bhutanese understand by “Contract of Guarantee”? The Contract Act of Bhutan 2013 is relatively new to the Bhutanese people, and I am confident that many legal fraternities and business people aren’t aware of the provisions. It is fair enough to say that the Movable and Immovable Property Act of 1999 is quiet old, yet it is branded as “complicated western-copied legislation” and many would have failed to comprehend the meaning of the law itself. However, to define what the law says, “A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of such person’s default.” It is a promise to discharge the liability of a third person in case of default.
The contract of guarantee includes three parties: Creditor, Principal Debtor and Surety. The person who gives the guarantee shall be referred to as the “guarantor” or the “surety”. The person in respect of whose default such guarantee is given shall be referred to as the “principal debtor” and the person whom the guarantee is given shall be referred to as the “Creditor.” Their legal relations are established through obligations and duties to perform the contract. Although it is not necessary to mention their respective legal obligations, however, it is significant to understand the duties of a guarantor in case of default by the principal debtor. Inadequate knowledge has cause numerous problems, bringing negative social implications.
Let me narrate one hypothetical case: The Sangay Bank Ltd. (the Bank) lends Nu.10 million to Mr. A; and secured 10 acres of land belonging to Mr. B and C. In this case, Mr. B and C are the guarantors of the Principal Debtor and the Creditor. Let’s further assume that the mortgaged property is that of Kidu land acquired 10 years ago. The Principal Debtor eventually fails to pay the money, and the Bank sue for recovery. What is the implication such eventuality?
What we can learn from this hypothetical situation (which actually appears in our society), is that Mr. B and C did not borrow any money from the Bank. Why on earth would pay (in actual sense), the money which was not at all borrowed by you? I know people would (and I too) still argue that “because they guaranteed to pay on behalf of the principal debtor”, so you are ultimately liable. This argument is perfectly valid – perhaps valid in the eye of law (and laws are made by humans) – but I still ask from the logical perspective: why would agreement to pay for someone’s behalf become still valid when you are getting nothing out of it?
In the law of contract, courts will only enforce a contract if both the sides are getting something out of it. This is called consideration in legal expression. In the contract of guarantee, “a promise to pay if the principal debtor default to pay” does not get anything out of it. A promise to pay itself would constitute a consideration if you get something from your promise. This however does not necessarily be in terms of money but something must be valuable.
Second, the guarantors here in this case become “landless”. Their 5 acres each kidu land is being auctioned. They are dispossessed for somebody’s inability to perform the legal obligations. Right to property is fundamental right for every citizen, and land is ultimate soul for every humans. We cannot deprive land merely because s/he has consented to become somebody’s surety. Do the guarantors sign the documents with sufficient legal information? When a guarantor is being summoned by the Bank to execute these agreements, were they explain legal duties and obligations? I have my personal experience where the Bank officials coerced me to sign “borrower’s indemnity agreement” when I was complaining for my lost Fixed Deposit documents. It becomes the responsibility of the Bank to explain the legal obligations of a guarantor. We cannot assume that people come to sign the contract of guarantee with full legal information. If adequate information is given, I am sure many would go back home without signing the document.
Why does bank sanction loan for somebody’s property? Why does bank sanction loan to Mr. A when he has no security? For the purpose of business and profit, aren’t we forgetting moral duty and sense of social responsibility? I ask these questions because a Guarantor Loan is generally termed as Unsecured Loan, and the expression itself is problematic.
As said already, the whole purpose of the guarantor is to discharge the liability of third person in case of default. Having a guarantor does not guarantee it’s full recovery. In the case of Dechen Dechen, she was a guarantor to her friend who ultimately has defaulted. Her friend has absconded from the country; and the guarantor cannot stop his/her principal debtor from absconding. It is mere impossibility to observe each and every step of a principal debtor. Dechen Dechen has however paid more than 75% of the actual borrowing of her friend. But the question is, how will the Bank recover the money if Dechen is absconded too?
When I write this article, I do not intend to argue that financial institutions should do away with guarantor loan. I am not qualified to challenge the established doctrine of law of contract. What I intend to say is that there should be established norms and legal procedure as to who shall be the guarantor. Perhaps, guarantors should be limited to spouses or immediate family members. I think this will certainly help! Unless that is done, people should think twice before you become a guarantor.