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CMA Intermediate · Business Laws and Ethics · Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency

Lakshmi Bank advanced Rs 2,00,000 to Vikram on the guarantee of Anand. The bank also held a mortgage over Vikram's machinery, valued at Rs 80,000, as further security for the loan. Without Anand's consent, the bank cancelled the mortgage. Vikram later defaulted, and the bank sued Anand. What is Anand's liability?

Anand is liable for Rs 1,20,000. Because the bank released the Rs 80,000 mortgage without his consent, he is discharged only to the extent of the security's value, leaving 2,00,000 minus 80,000 payable by him.

  1. ARs 2,00,000, as the mortgage was a separate contract
  2. BNil, because he is wholly discharged
  3. CRs 1,20,000, as he is discharged to the extent of Rs 80,000Correct
  4. DRs 80,000 only

Explanation

A surety is entitled to the benefit of every security the creditor has against the principal debtor when the suretyship is entered into. If the creditor parts with it without the surety's consent, the surety is discharged to the extent of its value. Thus 2,00,000 - 80,000 = 1,20,000. Full discharge is wrong as the discharge is limited to the security's value.

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