Skip to content

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

Mr. Rajan guaranteed a Rs 10 lakh loan given by a bank to Kaveri Traders. At the time of the guarantee, the bank also held a pledge of Kaveri's stock worth Rs 4 lakh, which Rajan did not know about. Later the bank released the stock without Rajan's consent, and Kaveri defaulted. Under the Indian Contract Act, 1872, how is Rajan's liability affected?

Rajan is discharged to the extent of Rs 4 lakh. Under Section 141, a surety benefits from every security the creditor held when the guarantee was given, even if unknown to him, and releasing it without his consent discharges him pro tanto, up to its value.

  1. AHe is discharged to the extent of Rs 4 lakh, the value of the security releasedCorrect
  2. BHe is not discharged at all, because he did not know of the security
  3. CHe is wholly discharged from the guarantee
  4. DHe is discharged only if the bank had promised him it would keep the stock

Explanation

Section 141 entitles a surety to the benefit of every security the creditor has at the time of the contract, whether or not he knows 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 4 lakh, leaving Rs 6 lakh. Knowledge is irrelevant, so the second option is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Advances, Securities and Documentation shows your real accuracy, how long you take and where you lose marks.

Practise Advances, Securities and DocumentationFree diagnostic mock

More Advances, Securities and Documentation questions