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

Mohan borrowed Rs. 8,00,000 from Eastern Bank on the guarantee of Suresh. At the time the guarantee was given, the bank already held a mortgage over Mohan's godown worth Rs. 3,00,000 as security for the loan. Later the bank released that mortgage without informing Suresh. Mohan defaulted. What is the effect on Suresh's liability?

Suresh is discharged to the extent of Rs. 3,00,000. A surety benefits from every security the creditor held when the guarantee was given, even if unaware of it, and releasing it without consent discharges the surety only up to its value.

  1. ASuresh is discharged completely because the mortgage was released
  2. BSuresh is not discharged because he did not know of the mortgage
  3. CSuresh is discharged only to the extent of the value of the security released, Rs. 3,00,000Correct
  4. DSuresh remains liable for the full amount as the bank can sue Mohan

Explanation

Under Section 141 of the Contract Act, a surety is entitled to every security the creditor held at the time of the suretyship, whether or not he knew of it. If the creditor parts with it without the surety's consent, the surety is discharged to the extent of its value, here Rs. 3,00,000. Complete discharge is wrong as the section limits it to value.

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