Discharge of surety by Palak Agarwal @ LexCliq

Discharge of Surety

Discharge by Release or Discharge of the Principal Debtor

There are two forms of liability discharges contemplated by Section 134

In the first case, if the borrower enters into some agreement or settlement with the principal debtor, the surety is released as well. However, as the Supreme Court held in Maharashtra SEB v. Official Liquidator, if a principal debtor is discharged under insolvency rules, or by liquidation in the case of a company, the surety is still liable.

The discharge of the surety as a result of the creditor’s omission is the second scenario contemplated by the provision. For example, if a surety guarantees the principal debtor’s performance of a contract that is contingent on the creditor’s supply of materials, and the latter fails to do his part, the debtor and the surety are both discharged.

  • The Promise Not to Sue, the Extension of Time, and the Composition

As per Section 135 of the Act, a Contract between the creditor  and the principal debtor  under which the bank makes a piece with, or offers to give the principal debtor  time not to sue, discharges the guarantee except if the guarantee consents to the contract.

Sections 136 and 137 of the Act provide exceptions to the general rule in Section 135 of the Act. The surety is not relieved from his responsibility under Section 136 of the Act if the creditor makes a contract to give time to the principal debtor with a third party rather than the principal debtor.

Whereas, If the guarantee contract does not have any clause to contrary , the creditor’s inability to arraign the principal debtor or to institute some other remedy against him doesn’t discharge the guarantee, Section 137 helds that the creditor’s inability to sue the principal debtor or to force some other cure against him doesn’t discharge the guarantee.

Discharge when the Surety’s Remedy is Impaired

The majority of the scenarios in which a surety’s rights can be discharged are covered by Section 139 of the Act. The surety is discharged if the creditor acts in a way that is inconsistent with the surety’s rights or fails to act in a way that his duty to the surety needs him to do, and the surety’s ultimate remedy against the principal debtor is harmed as a result. As a result, it is the creditor’s liability not to do something that would jeopardize the surety’s subsequent rights against the debtor

  • Discharge through Revocation

A continuing guarantee may be revoked by giving notice to the creditor under Section 130 of the Act. The provision specifies that only to future transactions the revocation  can be applied and not to transactions that have already taken place.

The court ruled in Harigopal Agarwal v. SBI that when a company’s directors guarantee the company’s loans and then resign, their liability is limited to the amount owed prior to their resignation. They will not be liable for any money owed to them after they resign. Nonetheless, as portrayed in Sita Ram Gupta v. Punjab National Bank, if an individual defers their right of repudiation of a continuing guarantee  in the contracts’s terms, they will be expected to take responsibility and won’t disavow the contract later.


by Palak Agarwal @ LexCliq

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