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

Bank Z sanctioned a loan to Gupta Exports, guaranteed by Mr. Sharma, and held a registered mortgage over Gupta's warehouse at the time of the guarantee. Before enforcing under SARFAESI, the bank, without telling Sharma, gave up the mortgage over the warehouse, then Gupta defaulted on Rs 50 lakh. The warehouse was valued at Rs 30 lakh. Which view is correct?

Sharma is discharged to the extent of Rs 30 lakh, the value of the warehouse mortgage released without his consent, so he remains liable for at most Rs 20 lakh. Section 141 of the Contract Act discharges a surety pro tanto when the creditor parts with security.

  1. ASharma remains liable for Rs 50 lakh, as SARFAESI overrides the Contract Act
  2. BSharma is discharged completely because the bank lost its right under Section 26D
  3. CSharma is discharged to the extent of Rs 30 lakh, so the bank can claim at most Rs 20 lakh from himCorrect
  4. DSharma is liable for Rs 30 lakh only, being the value of the security

Explanation

Under Section 141, release of a security held at the time of the guarantee, without the surety's consent, discharges the surety to the extent of its value: Rs 50 lakh minus Rs 30 lakh gives Rs 20 lakh. Section 26D concerns enforcement registration and does not make the surety wholly discharged. The fourth option reverses the arithmetic.

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