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

Kiran borrowed Rs 2,00,000 from Bharat Bank on the guarantee of Anil. At the time of the guarantee the bank also held a pledge of Kiran's goods worth Rs 80,000. Without Anil's consent the bank released the goods to Kiran. Kiran defaults on the full loan. Under section 141 of the Contract Act, how much can the bank recover from Anil?

The bank can recover Rs 1,20,000 from Anil. Under section 141 the surety is discharged to the extent of the value of a security the creditor parts with without his consent, so Rs 80,000 is deducted from Rs 2,00,000, whether or not Anil knew of the security.

  1. ARs 2,00,000, as Anil did not know of the security
  2. BRs 1,20,000, as Anil is discharged to the extent of the security's valueCorrect
  3. CRs 80,000, the value of the released goods
  4. DNil, as Anil is wholly discharged

Explanation

Section 141 entitles a surety to every security the creditor holds at the time of the guarantee, whether or not he knows of it. If the creditor parts with it without his consent, the surety is discharged to the extent of its value. So Rs 2,00,000 less Rs 80,000 gives Rs 1,20,000. Rs 2,00,000 ignores the discharge. Rs 80,000 is the amount discharged, not the amount recoverable.

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