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

Mr. Desai agreed to guarantee a term loan to Nova Foods on the understanding that the bank would not act on his guarantee until Mr. Bose also joined as co-surety. The bank disbursed the loan, but Mr. Bose never signed. Nova Foods defaulted. Can the bank enforce Mr. Desai's guarantee?

The bank cannot enforce it. When a guarantee is given on condition that the creditor will not act until a named co-surety joins, and that person does not join, the guarantee is not valid, regardless of disbursement.

  1. ANo, because the guarantee is not valid when the named co-surety does not joinCorrect
  2. BYes, because the bank has already disbursed the loan
  3. CYes, but only for half the amount
  4. DNo, because a guarantee must always be in writing to be valid

Explanation

Where a guarantee is given on the contract that the creditor shall not act on it until another person joins as co-surety, the guarantee is not valid if that person does not join. Mr. Bose did not join, so the guarantee fails. Proportionate liability is not provided for. A guarantee may be oral or written, so the writing argument is wrong.

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