Corporate guarantee for a personal loan
Khalid Khan
March 30
I am not sure if you are aware of the legal proceedings initiated against Mr. Anil Ambani by Chinese banks in London and State Bank of India in Mumbai.The matter in issue pertains to a loan of USD 717 million provided to Reliance Communications (RCom) from three Chinese banks.

Even though Mr Anil Ambani had stated the personal guarantee was not signed by him the court went ahead and has shut out his defence in the UK courts because of his inability to deposit a sum of $100 million personally.

If you are not aware of Mr Anil Ambani then for your information he is the younger brother of richest man of Asia, Mr Mukesh Ambani (Chairman of Reliance Industries Ltd). At one time Mr Anil Ambani's personal wealth was estimated to be $43 billion. As you can guess from the above he belongs to an influential family and as such he can afford lawyers etc to defend him in the court cases but would you give a personal guarantee for a loan taken by you or corporate guarantee for a loan taken by one of your partners?

I would give you an example, a friend of mine was recently trying for some personal financing and happens to have an investor visa. The finance house after wasting his time for more than a month when he has complied with their every request told him in the end that okay the loan is approved but since you have investor visa we need 48 post dated cheques from your company and NOC from your business partners. He asked them are you going to sign the agreement with the company or me? The finance house said with you but we need guarantee from the company.

I am not sure if the finance house has ever read corporate governance books or know what is ethical and unethical but this was a very unreasonable request to make and as such I advised him not to accept this demand of them and reject financing from their end.
Why do I advise him to do so? Here are the reasons:
  1. Loan is personal and not corporate loan.
  2. Cheque bounce is a criminal offence
  3. If you fail to pay then only you are liable and company won't be responsible
  4. If the cheque bounced then you will be responsible for civil while the company will be responsible for criminal actions including all the partners.
  5. This is a conflict of interest situation where the personal interest of a partner is colliding with the company's interest.
  6. This would be unethical on the part of the company to issue a kind of corporate guarantee for personal loan of one of the shareholders/director.
If you face such a situation then please don't accede to any such unreasonable and unethical demand.
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