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

Meenakshi Traders borrowed a loan from Southern Bank, and Rajan guaranteed it. When Rajan gave the guarantee, the bank already held a mortgage over Meenakshi's godown worth ₹6 lakh as security for the same loan. Later, without Rajan's consent, the bank released the mortgage. Meenakshi defaults. What is Rajan's position under the Indian Contract Act, 1872?

Rajan is discharged to the extent of the value of the released mortgage, ₹6 lakh. Under Section 141 a surety benefits from every security held at the time of the guarantee, even if unknown to him, and the creditor's release without consent reduces his liability by that value.

  1. AHe remains liable in full because the guarantee is independent of other securities
  2. BHe is discharged to the extent of the value of the released security, ₹6 lakhCorrect
  3. CHe is discharged completely because any release of security ends the guarantee
  4. DHe is discharged only if he had known of the mortgage when he gave the guarantee

Explanation

Section 141 gives the surety the benefit of every security the creditor held when the guarantee was entered into, whether or not the surety knew of it. If the creditor parts with it without the surety's consent, the surety is discharged to the extent of its value. The release was worth ₹6 lakh, so Rajan is discharged to that extent. Full discharge is wrong because the discharge is limited to the value of the security.

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