No easy exit for loan guarantors

From now on, it will be wise to think twice before agreeing to be a guarantor for someone looking for loans from banks or other institutions. Guarantors will no longer be able to distance themselves from the original borrowers and escape the liability of repaying the entire loan with interest in the event of default by using court stay orders as shields.

In a landmark verdict, the Appellate Division of the Supreme Court has cleared the way for lenders to auction the property of guarantors, in case borrowers failed to repay loans.

Disposing of an appeal, the court ruled in January this year that guarantors cannot stop the bidding process by filing writ petitions. The full verdict released by the Supreme Court recently made it clear that, under the Money Loan Court Act, there is no bar on banks selling out guarantors' properties to adjust their unpaid loans.

Loan guarantors have filed around 13,641 writ petitions with the High Court in the past five years to stop banks from selling out their mortgaged properties to adjust Tk40,000 crore in unpaid loans. Nearly 80% of the petitioners obtained stay orders in their favour, according to Supreme Court data.

Bankers see the verdict as a boost to their drive to recover defaulted loans.

Mohammad A (Rumee) Ali, former chairman of AB Bank, told The Business Standard that the purpose of having guarantors is to guarantee the repayment of loans.

"This historic judgement of the Appellate Division has paved the way for banks to recover defaulted loans," he added.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told TBS that as per law, when a borrower defaults their guarantor also becomes listed as a defaulter.

"Many become guarantors easily. But from now on, before becoming a guarantor, they will think twice about their ability to repay the loan. This will make it easier for banks to recover loans," he added.

In 2008, AK Alli Traders, an importer of machinery, took Tk11 crore from a Gazipur branch of Agrani Bank, but the borrower defaulted in 2011. At the time, the repayable amount, including interest, stood at Tk19 crore.

To recover the money, the lender filed a case with the Gazipur money loan court against Alli Reza Shawn, owner of the company, and also made his loan guarantor, Dewan Murad Hossain, a businessman and friend of Shawn, a defendant.

In 2015, the bank, upon a court order, put the mortgaged property up for auction. But, failing to find a bidder, it took possession of the property, which covered just half of the unpaid amount.

Upon a fresh petition, the court through a decree went for the realisation of the rest of the money by auctioning the guarantor's properties – an auto-rice mill and a rest house.

But when the guarantor filed a writ petition the High Court in 2016 stayed the auction process for six months.

In January this year, the Appellate Division scrapped the High Court order after disposing of an appeal moved by the bank.

In its full judgement, the court also said according to the Money Loan Court Act, there is no bar to adjusting banks' loans by auctioning the properties of guarantors.

The verdict said Section 6(5) of the Artha Rin Adalat Ain allows a financial institution to sue the guarantor of a loan when the original borrower defaults the repayment. It says the judgement, order or decree of a court in the case shall be enforceable against all the defendants jointly and separately.

To recover the claim by way of decree, the court shall first attach the property of the main defaulters and then that of the guarantor to the extent possible, the judgement mentioned.

However, if the guarantor pays the claim in favour of the plaintiff, the said decree shall be transferred in their favour respectively, and they may enforce the same against the defaulter, it added.

The Appellate Division observed that sometimes guarantors or defaulters receive orders in their favour by misleading the High Court in such matters. And the High Court often fails to understand the core spirit of the law.

The High Court has also been directed to conduct the proceedings of any new writ petitions with caution.

Why guarantors are in trouble

Deputy Attorney General Imran Ahmed Bhuiyan, who is an expert on bank company laws, told TBS that in almost all cases, one or more persons or organisations provide a guarantee for a loan taken from a bank or a financial institution.

In the event of default, the guarantor is also liable to repay the loan. That is why the guarantor also becomes a debtor even though he did not take the loan, he said.

"Therefore, in case of default, there is a provision in the existing Money Loan Court Act to sue not only the borrower but also the guarantor for debt collection," he added.

Pending writ petitions of guarantors

In 2022, guarantors filed 3,144 writ petitions, involving around Tk9,000 crore in the original cases. In 2021, the number of such petitions was 2,862, involving about Tk6,400 crore, and 2,113 petitions were filed in 2020, involving about Tk5,800 crore.

In 2019, guarantors moved 2,976 writ petitions, where about Tk8,000 crore was involved in the original cases, and in 2018, the number was 2,546 involving about Tk11,000 crore.

What will happen to the petitions?

Bank company law expert Shah Mohammad Ahsanur Rahman said following the Appellate Division's historic judgement defaulters will come under "some kind of social punishment".

"No one will agree to become a guarantor easily. And when a guarantor is not available, borrowers will become very cautious while taking a loan," he explained.

Ahsanur Rahman noted that loan defaulters used to go to the High Court with various strategies to get their names removed from the Credit Information Bureau's list, but the scope is almost closed now.

The legal expert said the pending writ petitions will now be dismissed as per the Appellate Division judgement.

However, Attorney General AM Amin Uddin told TBS that the Appellate Division in its judgement has instructed the High Court to hold a hearing on any new writ petition of guarantors and pass an order cautiously. The High Court benches concerned have also been directed to immediately dispose of the old petitions.

More guarantors fall into litigation trap

About 72,000 cases filed by banks and non-bank financial institutions to recover defaulted loans of about Tk1.6 lakh crore are pending in various money loan courts across the country.

There are around 26,000 cases pending in just four money loan courts in Dhaka. The number of guarantors in these cases involving Tk70,000 crore is almost twice as high at 50,000.

Businessman ABM Osman Gani, who has become the defendant as a guarantor in a case filed by AB Bank for the recovery of defaulted loans of around Tk80 crore, said, "A close relative – my sister's husband – has defaulted on the loan. He easily persuaded me to become a guarantor while taking loans. Now I am tired of appearing in court."

Kamrul Islam Babla, owner of Samir International, owes Islami Bank Tk4 crore and the bank, as per a court order, has already taken possession of the property mortgaged against the loan to recover Tk17 crore.

Now the court has ordered the auction of the property of Ehteshamul Haque, the guarantor of the loan and an uncle of the borrower, to adjust the remaining amount.

In April, Ehteshamul filed a writ petition, seeking a stay on the order. His lawyer, Masul Ahmed, said the writ petition has not been heard yet.

After the judgement of the Appellate Division, it does not seem that an order will come in favour of the petition.