Recovery Proceedings by DRT against the Guarantors Are Without Jurisdiction

It is submitted that the recovery proceedings under section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as “DRT Act”) against the Guarantors are absolutely without jurisdiction. As per Black’s Law Dictionary, Ninth Edition, at page 1389, “recovery” means the regaining or restoration of something lost or taken away. It follows that the DRT has no jurisdiction to proceed against the Guarantor, as he has not taken any "debt", which he has to repay. 

As per section 4 of the U.S. Statutes of Frauds, 1677 a promise ‘to answer for the debt, default or miscarriage of another person’ is a contract of guarantee. The Guarantor promises to discharge the debtor’s liability if the debtor should fail to do so. The Guarantor’s liability is, therefore, secondary to that of the principal debtor {Guild & Co. v. Conrad (1894) 2 QB 885, 896}. The concept is explained below.

 (i) As per scheme of Indian Contract Act, 1872 ultimately the debt is to be recovered from the principal debtor, either primarily by the creditor or finally by the guarantor. Certainly, there is no mandate of Contract Act that finally the principal debt is to be recovered from the guarantor. (please consecutively refer sections 126, 140, 141 and 145)

(ii) The Guarantor is entitled to submit before DRT and/or Court that the personal guarantee agreement is not based upon a real consent, but was induced by undue influence by the Bank. The consent of the Guarantor having obtained by undue influence by the Bank, therefore, the personal guarantee agreement is voidable at the option of the Guarantor under section 19-A of the Contract Act.

 (iii) It is undisputed that, firstly, there is such an inequality of bargaining power between the Bank and the Guarantor that the Bank can cause economic duress to the Borrower and/or Guarantor; secondly, the personal guarantee agreement is always drawn up one-sidedly.