Is Personal Guarantee of Director is Compulsory in case of loan to company ??
This query is : Resolved
Quick Summary
14 April 2026
A Private Limited (Closely Held Company) took loan from XYZ bank. Loan is secured by mortgaged assets but even if Bank is demanding personal guarantee of Directors.
Directors and Shareholders are same.
Is personal guarantee of director is compulsory ????
Directors and Shareholders are same.
Is personal guarantee of director is compulsory ????
14 April 2026
A personal guarantee from directors for a bank loan to a Private Limited Company is not legally compulsory under statutory law, but it is a standard commercial practice that banks exercise at their discretion.
While a Private Limited Company is a separate legal entity and the directors' liability is normally limited to their shareholding, banks often insist on personal guarantees to ensure "skin in the game" and accountability.
While a Private Limited Company is a separate legal entity and the directors' liability is normally limited to their shareholding, banks often insist on personal guarantees to ensure "skin in the game" and accountability.
14 April 2026
RBI Guidelines on Selective Use: According to the Master Circular on Guarantees and Co-acceptances, banks are encouraged to obtain guarantees only when absolutely necessary and not as a matter of course for public sector projects. However, for private companies, they remain a primary requirement for most credit facilities.
14 April 2026
Since it is a matter of the bank's internal credit policy rather than a strict law, you can try to negotiate the following:
Limited Guarantee: Limit your liability to a specific amount or a percentage of the loan rather than an "unlimited" guarantee.
Release Clause: Propose that the guarantee be released once the company reaches a certain financial milestone (e.g., a specific Debt-Equity ratio or Net Worth).
Substitution of Collateral: Offer additional tangible security (like more property or FDRs) in exchange for waiving the personal guarantee requirement.
Limited Guarantee: Limit your liability to a specific amount or a percentage of the loan rather than an "unlimited" guarantee.
Release Clause: Propose that the guarantee be released once the company reaches a certain financial milestone (e.g., a specific Debt-Equity ratio or Net Worth).
Substitution of Collateral: Offer additional tangible security (like more property or FDRs) in exchange for waiving the personal guarantee requirement.
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