CS Professional · Banking and Insurance - Laws and Practice · Advances, Securities and Documentation
Shreya Traders borrowed Rs 10,00,000 from Western Bank on the guarantee of Mr. Anand. At the time of the loan, the bank also held a mortgage over Shreya's warehouse worth Rs 4,00,000, of which Anand was unaware. Without telling Anand, the bank released the mortgage. Shreya later defaulted on the full Rs 10,00,000. What is Anand's position?
Anand is discharged only to the extent of Rs 4,00,000. A surety benefits from every security held at the time of the guarantee, even if unknown to him, and releasing it without his consent discharges him up to its value, leaving Rs 6,00,000.
- AHe is discharged only to the extent of Rs 4,00,000, the value of the security releasedCorrect
- BHe remains liable for the whole Rs 10,00,000 because he did not know of the mortgage
- CHe is discharged entirely because any security was released
- DHe is discharged only if the bank had promised him it would keep the mortgage
Explanation
A surety is entitled to the benefit of every security the creditor holds against the principal debtor when the guarantee is made, 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. Anand is therefore discharged up to Rs 4,00,000 and liable for Rs 6,00,000. Total discharge is wrong because the discharge is limited to the security's value.
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