Is Personal Guarantee of Director is Compulsory in case of loan to company ??

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Personal guarantee of directors is not legally compulsory, but banks commonly require it as per internal policies. It can be negotiated with limits, release clauses or additional collateral instead.

CA. Ankit Vijaywargiya

CA. Ankit Vijaywargiya (Querist)

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 ????

Dhirajlal Rambhia

Dhirajlal Rambhia

(Expert)

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.

Dhirajlal Rambhia

Dhirajlal Rambhia

(Expert)

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.

Dhirajlal Rambhia

Dhirajlal Rambhia

(Expert)

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.

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

14 November 2026 No law makes a personal guarantee compulsory. It is the bank's credit condition, so it can be negotiated. Points the directors should weigh:

• Risk: a personal guarantor can be pursued directly without waiting for the company's insolvency. Insolvency proceedings against personal guarantors of corporate debtors under Part III of the IBC have been upheld by the Supreme Court (Lalit Kumar Jain, 2021).
• Negotiation points: full asset cover (security cover above 1.5x), a cap on the guarantee (limited to a portion of the loan), release on repayment of a set tranche, or CGTMSE cover for eligible MSME loans instead of collateral or guarantee.
• Companies Act: a director guaranteeing the company's loan is not a loan to the director, so Sec 185 is not attracted. The company may pay a guarantee commission. If it does, that is a related party transaction (Sec 188) and taxable income of the director.
• Disclosure: note the guarantee in the financial statements (Schedule III requires disclosure of loans guaranteed by directors) and in the director's own net-worth statements.
• Practical: if the bank insists, at least ensure the guarantee is co-extensive only with this facility, not a continuing all-moneys guarantee.

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