Wednesday, 19 September 2012

Define guarantee and discuss its main characteristics of guarantee and explain the advantages and disadvantages of guarantee

"Contract to perform the promise or discharge the liability of a third person in case of his default".
Guarantee as security for bankers 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.


Following are the main features of guarantee :
1. Parties :-
There are three parties involved in a guarantee, creditor, debtor and guarantor.

2. Liability :-
Basic liability of payment of debt falls on the debtor. If he fails to pay then responsibility falls on the guarantor.

3. Interest :-
Creditor and debtor has interest in the contract but guarantor has no interest in the contract.


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.

1. Minors and unsound minded person can not become a guarantor.

2. A married women is not considered a free agent. She can only contract against her separate property.

3. Normally registered companies can borrow the loan but have no power to become a guarantor if the firm is authorized then it is possible.

4. In case of partnership a single partner can not become the guarantor. If such powers are given by all the partners to any one then it is possible, otherwise partners should sign on the deed.


1. Contract of guarantee requires written evidence while in contract of indemnity there is no need of written evidence.

2. In case of indemnity there is one contract of liability while in case of guarantee there are two contracts.


Following are the important advantages of the guarantee :

1.    It is very easier security as compared to mortgage of property.

2.    It gives maximum protection to the lender.

3.    The sign can be easily obtain from the guarantor on the form by the bank and there is no need of preparing deed.

4.    The banker may call guarantor and tell him about the default of debtor.

5.    By a simple court action a guarantee can be enforced.

6.    In case of default a banker and guarantor both pressurize the borrower to repay the debt.


1.    If the guarantors property is destroyed or sold during the period of contract and borrower also fails to pay the debt. In this case it is very difficult to recover the amount from both the parties.

2.    Sometimes if the bank changes the constitution then guarantee is terminated.

3.    Sometimes the loan is not returned and bank claims in the court against the guarantor but it is rejected on technical ground.

4.    In case of amalgamation with other banks the guarantee is terminated.

Keeping in view the above facts we may say that its importance can not be ignored.


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