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CMA Foundation · Fundamentals of Business Laws and Business Communication · Meaning of Indemnity, Guarantee, Pledge, Agent

Rohan gave a continuing guarantee to a bank for Rs 10,00,000 covering bills the bank may discount for Sunrise Ltd. The bank discounted bills worth Rs 2,00,000. Rohan then gave notice of revocation to the bank. The bank later discounted further bills worth Rs 3,00,000, and Sunrise Ltd defaulted on all bills. Rohan is liable for:

Rohan is liable for Rs 2,00,000. A surety may revoke a continuing guarantee as to future transactions by giving notice to the creditor, but remains liable for transactions already made. The bills discounted after the notice are not covered by his guarantee.

  1. ARs 5,00,000, being all the bills discounted
  2. BRs 2,00,000, the bills discounted before the noticeCorrect
  3. CRs 3,00,000, the bills discounted after the notice
  4. DRs 10,00,000, the full amount guaranteed

Explanation

Under Section 130 a continuing guarantee may be revoked by the surety, as to future transactions, by notice to the creditor. Transactions before the notice remain covered, as in illustration (a). So Rohan stays liable for the Rs 2,00,000 and is discharged for the later Rs 3,00,000.

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