A guarantor is a person who promises to pay another’s debt or fulfil his/her contractual obligation if that other person/firm fails to pay his debt.
Setting up a business is both a time-consuming and costly affair, so most people take Loans to start with. The need for money does not end even after the business is nicely set-up and showing progress. Those in business constantly require money at one or the other time, be it purchase, transport, day-to-day operation and expansion, etc. For businesses to avail a commercial loan from any of the banks is also not very difficult. But banks do need a guarantor or surety before approving such loan requests and this is considered as the key aspect.
Who Is A Guarantor?
A guarantor is a person who promises to pay another’s debt or fulfil his/her contractual obligation if that other person/firm fails to pay his debt or perform its obligation. Everything is perfectly fine as long as the repayment happens on time. But a guarantor comes into trouble once the loan is not repaid as the Supreme Court has ruled that the principal debtor and the guarantor or surety provider are equally liable to be proceeded against for recovery of a loan by the creditor.
Similarly, wives of entrepreneurs who stand guarantee for their spouses’ business loans also face the prospects of legal hassles and recovery of the loan in case of a default.
There is a growing tendency in business families to make wives a director or partner in any venture to retain complete control over their business.
In many cases, the wife may not even be remotely involved the business and its dealings.
It does work well as an arrangement but surely spells trouble for all involved – directly or indirectly – if the company defaults in loan repayments.
The lender has the power to attach any asset that belongs to the wife to recover the loan.
Ways To Safeguard Wife’s Assets
- Establish LLP: A business can be run under different structures – sole proprietorship, partnership, limited liability partnership (LLP) and private limited. The best way to safeguard a wife’s assets is for you to run your business as an LLP as the liabilities in an LLP are limited.
- 2. Setting up a trust: Parents who bequeath property to their daughters at the time of marriage can set up a discretionary trust to manage these assets and name the daughter as its beneficiary.
Such an arrangement will help safeguard assets as lenders can’t attach assets of such beneficiaries.
What If A Wife Runs Her Separate Business?
Suppose X is running her own cosmetics business and has become a guarantor for her husband Y’s garment business. Unfortunately, Y was not able to sustain his business and defaulted on his business loan. The bank sent a notice to X, his wife.
The amount was huge and could have had an adverse impact on her fast-growing business of cosmetics.
X acted smartly, discussed the issue with her CA and transferred her business to her sister Z at a fair market price.
By doing this she was not only able to repay the loan amount but was also able to save her flourishing business.
Lenders Can’t Hold A Woman Liable If:
- She has no role to play in her husband’s business. In such cases, as per the Married Women’s Property Act, lenders cannot attach assets in her name.
- In case of joint ownership of an asset, the lender is duty-bound to return to the wife her share of the asset after liquidating it.
- If a director is not a guarantor, banks cannot hold her liable for default.
In any case, one must clearly understand the legal obligation before becoming a guarantor.