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Kinds of Guarantee

A Guarantee is a legal commitment where one party (the guarantor) promises to fulfill the obligations or debts of another party (the principal debtor) in case of default. Guarantees can be classified based on their nature, scope, and conditions. Below are the key types of guarantees:

1. Specific Guarantee

  • A guarantee provided for a single specific transaction or obligation.
  • The guarantor’s liability ends once the specified transaction is complete or the obligation is fulfilled.
  • Example: A guarantees the repayment of a ₹50,000 loan for a one-time purchase of goods.

2. Continuing Guarantee

  • A guarantee that applies to a series of transactions or obligations.
  • The guarantor’s liability remains in effect until the guarantee is revoked or the transactions are completed.
  • Example: A guarantees a credit facility provided by a bank to B for recurring business transactions.

3. Personal Guarantee

  • A promise made by an individual (the guarantor) to repay the debt or fulfill the obligations of the principal debtor if they default.
  • Example: A business owner personally guarantees a loan taken by their company.

4. Corporate Guarantee

  • A guarantee given by a company to secure the obligations or debts of another company (often a subsidiary or affiliate).
  • Example: A parent company guarantees the loan taken by its subsidiary company.

5. Bank Guarantee

  • A guarantee issued by a bank on behalf of its client to ensure that the client fulfills their obligations.
  • If the client defaults, the bank pays the beneficiary the guaranteed amount.
  • Common Uses:
    • Construction projects.
    • Payment security in international trade.
  • Example: A buyer provides a bank guarantee to a seller to ensure payment upon successful delivery of goods.

6. Performance Guarantee

  • A guarantee provided to ensure the completion of a project or performance of a contract as per agreed terms.
  • If the contractor or service provider fails to perform, the guarantor compensates the beneficiary.
  • Example: A construction company provides a performance guarantee to ensure the timely completion of a building project.

7. Financial Guarantee

  • A guarantee that ensures the repayment of a loan, bond, or other financial obligation.
  • Typically used in loans, securities, or credit arrangements.
  • Example: A financial institution guarantees the repayment of a bond issued by a company.

8. Advance Payment Guarantee

  • A guarantee issued to secure the advance payment made by a buyer to a seller.
  • If the seller fails to deliver the goods or services as agreed, the buyer can claim the advance payment from the guarantor.
  • Example: A buyer pays an advance to a manufacturer for goods, and the manufacturer’s bank provides an advance payment guarantee.

9. Deferred Payment Guarantee

  • A guarantee where the guarantor promises to make payments at a future date if the principal debtor fails to do so.
  • Common in deferred payment sales or credit purchases.
  • Example: A bank issues a deferred payment guarantee for goods purchased under installment terms.

10. Conditional Guarantee

  • A guarantee that becomes enforceable only upon the occurrence of certain specified conditions.
  • The creditor must meet the conditions before demanding payment.
  • Example: A guarantee may be conditional on the principal debtor defaulting after a specified grace period.

11. Unconditional Guarantee

  • A guarantee where the guarantor’s liability is immediate and does not depend on any conditions.
  • The creditor can demand payment without proving the principal debtor’s default.
  • Example: A business provides an unconditional guarantee to a supplier for payment of goods.

12. Joint Guarantee

  • A guarantee where two or more guarantors jointly take responsibility for the principal debtor’s obligations.
  • The creditor can hold any one or all guarantors liable for the full amount.
  • Example: Two business partners jointly guarantee a loan taken for their business.

13. Several Guarantee

  • A guarantee where each guarantor is liable only for their proportionate share of the debt or obligation.
  • The creditor can only claim the respective share from each guarantor.
  • Example: Three guarantors agree to guarantee a debt of ₹3 lakhs, with each responsible for ₹1 lakh.

14. Limited Guarantee

  • A guarantee with a specified cap on liability, either in terms of amount or time.
  • Example: A guarantor agrees to be liable for only ₹5 lakhs of a ₹10 lakh debt.

15. Unlimited Guarantee

  • A guarantee where the guarantor agrees to cover the entire obligation or debt without any limit.
  • Example: A business owner provides an unlimited guarantee for the repayment of all debts owed by their company.

Summary Table

Type of Guarantee Description Example
Specific Guarantee For a single transaction or obligation. Guarantee for a one-time loan repayment.
Continuing Guarantee Covers a series of transactions or obligations. Guarantee for a recurring credit facility.
Personal Guarantee Individual assumes liability for the debtor’s default. A business owner guarantees a company loan.
Corporate Guarantee Company assumes liability for another entity’s debt. Parent company guarantees a subsidiary’s loan.
Bank Guarantee Bank ensures client’s obligations are fulfilled. Bank guarantees payment for construction contracts.
Performance Guarantee Ensures project or contract performance. Guarantee for completing a building project.
Financial Guarantee Ensures repayment of financial obligations. Guarantee for a corporate bond repayment.
Advance Payment Guarantee Secures buyer’s advance payment. Buyer secures advance paid to a manufacturer.
Deferred Payment Guarantee Ensures future payments on credit purchases. Deferred payment for goods under installment terms.
Conditional Guarantee Enforceable only upon specific conditions. Guarantee triggered after a grace period for default.
Unconditional Guarantee Liability is immediate and unconditional. Guarantee for immediate payment upon default.
Joint Guarantee Multiple guarantors are jointly liable. Business partners guarantee a business loan.
Several Guarantee Each guarantor is liable for their share only. Three guarantors each responsible for a portion of debt.
Limited Guarantee Liability is capped at a specific amount or time. Guarantor is liable for up to ₹5 lakhs only.
Unlimited Guarantee Guarantor has unlimited liability. Guarantor assumes all debts of a business.

These types of guarantees are commonly used in business, financial, and legal contexts to secure transactions and manage risks effectively.

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