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

Pooja Steels borrowed from Bank Z on the guarantee of Anil. When the guarantee was given, the bank held a hypothecation of stock worth ₹8 lakh and a decree-secured claim. The bank later lost the hypothecated stock through its own negligence in not enforcing its charge, and the stock became valueless. The outstanding debt is ₹15 lakh and Pooja is insolvent. For what amount can Z recover from Anil under Section 141, if the stock was worth ₹8 lakh at the time of loss?

The bank can recover ₹7 lakh from Anil. Section 141 discharges a surety to the extent of the value of a security the creditor loses, so ₹8 lakh is deducted from the ₹15 lakh debt, leaving ₹7 lakh.

  1. A₹15 lakh, since negligence does not affect a surety
  2. B₹8 lakh, being the value of the security lost
  3. C₹7 lakh, being the debt less the value of the lost securityCorrect
  4. DNil, since Anil is discharged completely

Explanation

If the creditor loses a security, the surety is discharged to the extent of its value. Discharge is ₹8 lakh, so the recoverable amount is ₹15 lakh minus ₹8 lakh = ₹7 lakh. The ₹8 lakh option mixes up the discharge with the recovery. Full discharge is wrong because only the value of the lost security is discharged.

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