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CS Professional · Banking and Insurance - Laws and Practice · Advances, Securities and Documentation

Anil guarantees a loan of Rs 5 lakh given by Orbit Bank to Deepa. When the guarantee was signed, Orbit Bank already held a mortgage on Deepa's shop as security for the same loan. Later, without Anil's consent, the bank released the mortgage; the shop was worth Rs 3 lakh. Deepa defaults on the full Rs 5 lakh. As per the Indian Contract Act, 1872, what is Anil's liability?

Anil is liable for Rs 2 lakh. Under section 141, when the creditor parts with a security held at the time of the guarantee without the surety's consent, the surety is discharged only to the extent of that security's value, here Rs 3 lakh.

  1. ARs 5 lakh, because the surety is liable as much as the debtor
  2. BNil, because the surety is discharged completely
  3. CRs 2 lakh, because he is discharged to the extent of the value of the security releasedCorrect
  4. DRs 3 lakh, because only the value of the security is recoverable from him

Explanation

Section 141 entitles a surety to the benefit of every security the creditor had when the guarantee was made. If the creditor parts with it without the surety's consent, the surety is discharged to the extent of its value. Here Rs 5 lakh minus Rs 3 lakh gives Rs 2 lakh. Option B wrongly applies full discharge.

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