A personal guarantee is a legal commitment by an individual (the guarantor) to repay a debt if the primary borrower defaults. However, while personal guarantees offer protection, they also carry significant risks, especially when unforeseen circumstances arise—such as the death of the guarantor. Thus, when a guarantor passes away, the personal guarantee does not simply disappear. Instead, the legal and financial consequences depend on various factors, including the terms of the guarantee, applicable laws, and the estate of the deceased guarantor.
This article aims to explore whether the legal heirs of a personal guarantor can be held liable after the guarantor's death. If so, it examines the extent of their liability and the implications when the said legal heir(s) or legal representative are themselves undergoing insolvency proceedings under the relevant provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
A contract of guarantee is defined under Section 126 of the Indian Contract Act, 1872 (“ICA”), as a contract to perform the promise or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the 'surety'; the person in respect of whose default the guarantee is given is called the 'principal debtor', and the person to whom the guarantee is given is called the 'creditor.'
In terms of IBC, Section 5(22) of the IBC defines PG as an ‘individual who is the surety in a contract of guarantee to a corporate debtor.' Further, Rule 3(e) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 defines guarantor as ‘debtor who is a personal guarantor to a corporate debtor and in respect of whom guarantee has been invoked by the creditor and remains unpaid in full or part.'
A common misconception is that the death of a guarantor extinguishes the guarantee. In most cases, the liability of the deceased guarantor does not automatically lapse upon their death. Instead, the obligation typically continues and is enforceable against the deceased’s estate. This means that assets left behind by the guarantor, including real estate, bank deposits and investments, etc., may be used to settle the outstanding debt. Now, the question arises as to how the said outstanding dues will be settled in such circumstances. In such a scenario, the legal heirs/ representatives of the deceased Personal Guarantor shall be arrayed as parties to the legal proceedings, and they shall be liable to the extent of the estate of the deceased personal guarantor inherited by them.
(See H. Basavaraj (Through LRs) vs. Canara Bank & Ors. (2010) 12 SCC 48, Kamal Gupta vs. Bank of India, 2007 (99) DRJ444, Smt. Indira Bai vs. Asst. Registrar, Cooperative Societies & Ors. W.P. No. 2368 of 2007).
Moreover, Section 131 of the ICA also clearly provides that in the case of the death of a guarantor, the guarantee executed in favour of the bank stands revoked only in respect to future transactions. Hence, the liability of the guarantor cannot be extinguished on his death so far as the liability which existed on the date of the death of the guarantor.
It is a settled position of law that the legal heirs of a deceased Personal Guarantor are not personally liable for the guarantee given by the deceased. The legal heirs are only liable to the extent of the estate they inherit from the deceased Personal Guarantor. In support of the same, reliance is being placed on the Judgment passed by the Hon’ble Supreme Court in the case titled as Vinayak Purshottam Dube (Deceased) through LR’s V/s. Jayashree Padamkar Bhat and Others, reported in 2024 INSC 159 wherein it was specifically held by the Hon’ble Supreme Court that “Legal representatives are liable for the debts of their predecessor, but their liability is limited to the extent of the estate of the deceased inherited by them." Thus, from the aforesaid, it is exceedingly clear that the liability of legal heirs/ representatives is strictly limited to the extent of the estate of the deceased personal guarantor inherited by them.
Though it is quite well-settled that the legal heirs of the deceased personal guarantor are only liable to the extent of the estate inherited by them from the deceased Personal Guarantor, what happens when the said legal heirs are themselves undergoing insolvency proceedings under IBC, 2016?
The said core issue encompasses the issue of whether or not personal insolvency proceedings under Section 96 of the IBC provide blanket protection to legal heirs from claims against the assets of the deceased personal guarantor. It may be noted that Section 96 of the IBC provides an interim moratorium on legal proceedings related to debts of an individual undergoing insolvency proceedings. However, this moratorium, in our considered view, applies strictly to debts owed personally by the individual and does not extend to the assets or liabilities inherited from a deceased personal guarantor.
The said position is also strengthened from the fact that in terms of Section 96, IBC, 2016, what is barred are proceedings with respect to the enforcement of debt by the creditor. Therefore, the provision's applicability is focused on the debt and not the debtor. Now, when we visit the definition of debt as defined under Section 3(11) of the IBC, "debt" is defined as a “liability or obligation to pay in respect of a claim." The key point here is the words “legal” or “obligation." The said words, more so in terms of the aforesaid settled position of law, would refer only to a personal obligation of the said legal heir(s) / representative facing insolvency and not the liabilities of the deceased personal guarantor in as much as they are not personally liable for or obligated to pay the debts of the personal guarantor but there liability is limited to the estate which they have inherited, which also in view of Vinayak Purshottam Dube (Deceased) through LR’s (Supra), is first to be utilised towards clearing the debts of the said deceased personal guarantor.
Moreover, these inherited assets are not excluded from the scope of IBC, 2016, as per Section 79 (14) therein. However, this does not make inherited assets the personal assets of the legal heirs’ by default and bring them within the purview of IBC, 2016, as the liabilities associated with the deceased personal guarantor are distinct from the personal liabilities of the said legal heirs and are the estate of the deceased personal guarantor is to be first utilised for discharging the monetary liabilities of the said personal guarantor.
Also, in most of the cases involving such a peculiar scenario, the Hon’ble NCLT has decided that the PGIRP proceedings would abate after the death of the PG. One such oft-cited order was delivered by Hon’ble NCLT, Delhi in Alchemist Asset Reconstructions Company v. Deepak Puri 2021 SCC OnLine NCLT 22414. There is another order from Hon’ble NCLT, Kolkata in the matter of Bank of Baroda, Stressed Asset Management Branch v Divya Jalan 2022 SCC OnLine NCLT 191, wherein it was held that the IRP proceedings must be closed after the death of the PG as it would otherwise offend the legislative scheme of IBC. Also, in the matter of Apogee Enterprises (P) Ltd. v. Anil Nanda, 2024 SCC OnLine NCLT 3562, it was held that insolvency proceedings under Section 95 of the IBC cannot continue after the death of the personal guarantor as the obligation is personal and non-transferable. Thereafter, in Bank of Maharashtra vs. Ashok Kumar Bansal C.P. (IB) No. 300/ ND /2022, the Hon’ble NCLT, Delhi was pleased to close the proceedings under Section 95, IBC, 2016 on the demise of the personal guarantor therein. However, the Hon’ble NCLT, Mumbai Bench-III, Special Bench in the matter titled as “Invent Assets Securitization and Reconstruction Private Limited vs. Popatlal K Jain” bearing C.P (IB)-203(MB)/2023 has taken a contrary view and has passed orders to implead the legal heirs of deceased Personal Guarantor in the insolvency proceedings on the demise of the personal guarantor.
Firstly, IBC does not address the procedural issues that may arise in case of demise of the PG amidst the insolvency proceedings. The legislature should clarify the procedural walkthrough in case of a demise of a PG and must clearly lay down the procedure and a lucid explanation of treatment/ exclusion of certain assets of the PG’s.
Secondly, the definition of PG may be amended to completely exclude legal heirs from its ambit. Due to the legislative void, the Hon’ble NCLTs have given a divergent view points on the aspect whether or not the proceedings will abate after the demise of the PG.
Lastly, the legislature may also indicate the operation of laws relating to succession / inheritance in case ancestral or coparcenary property of the PG is involved.
About the authors: Abhinav Mukhi is a Partner, Shantanu Tomar and Manisha Arora are Associates at asa Legal.
Disclaimer: This document is for informational purposes only and does not constitute legal, financial, or professional advice, as the contents thereof are the personal view of the author(s). Laws on personal guarantees and liability beyond death may vary based on jurisdiction and specific contractual terms. Readers are strongly advised to seek independent legal counsel for specific guidance. The author and affiliates are not responsible for any consequences arising from its use.
Disclaimer: The opinions expressed in this article are those of the authors. The opinions presented do not necessarily reflect the views of Bar & Bench.
If you would like your Deals, Columns, Press Releases to be published on Bar & Bench, please fill in the form available here.