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

Kaveri Traders obtains a Rs 20 lakh cash credit from a bank. Ramesh gives a guarantee for it. At the time of the guarantee the bank already holds a mortgage over Kaveri's godown, which Ramesh did not know about. Later the bank, without asking Ramesh, releases the mortgage. Under the Indian Contract Act, 1872, what is Ramesh's position?

Ramesh is discharged to the extent of the value of the released mortgage. A surety is entitled to every security the creditor held at the time of the guarantee, even if unknown to him, and release without his consent reduces his liability by that value.

  1. AHe is discharged to the extent of the value of the released securityCorrect
  2. BHe remains fully liable because he did not know of the security
  3. CHe is discharged only if the bank had told him about the security at the outset
  4. DHe is discharged in full whatever the value of the security

Explanation

Section 141 gives a surety the benefit of every security the creditor held against the principal debtor when the suretyship was entered into, whether or not the surety knew of it. If the creditor loses or parts with it without the surety's consent, the surety is discharged to the extent of its value. Option 2 is wrong because knowledge is irrelevant. Option 4 overstates the discharge, which is limited to the value.

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