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

Bank of Baroda lends Rs 5,00,000 to Kavita Exports on the guarantee of Anil. At the time of the loan the bank also holds a mortgage over Kavita's godown worth Rs 3,00,000, of which Anil was unaware. Later, without Anil's consent, the bank releases the mortgage. Kavita defaults. To what extent is Anil discharged?

Anil is discharged to the extent of Rs 3,00,000. He was entitled to the benefit of the godown mortgage existing when he gave the guarantee, even without knowing of it. The bank released it without his consent, so his liability falls to Rs 2,00,000.

  1. AFully discharged, Rs 5,00,000
  2. BNot discharged, as he did not know of the security
  3. CDischarged to the extent of Rs 3,00,000, the value of the securityCorrect
  4. DDischarged only for Rs 2,00,000

Explanation

A surety is entitled to the benefit of every security the creditor holds against the principal debtor when the guarantee is made, whether or not he knows of it. If the creditor parts with it without the surety's consent, the surety is discharged to the extent of its value, here Rs 3,00,000. Anil remains liable for Rs 2,00,000, so option 3 reverses the figures.

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