The Supreme Court has held that a guarantor cannot be held liable for amounts withdrawn by a borrower beyond the sanctioned loan limit when the modification occurred without the guarantor’s consent. However, the guarantor remains liable for the amount originally guaranteed.
A Bench of Justices B.V. Nagarathna and Ujjal Bhuyan set aside the Gujarat High Court judgment which had discharged the sureties from the entire liability.
Court Examines Sections 133 and 139
The Court analysed the law governing guarantees under Chapter VIII of the Indian Contract Act, focusing on Sections 133 and 139.
Section 133 states that if the creditor and the principal debtor change the terms of their contract without the surety’s consent, the surety is discharged only for transactions that occur after the change.
Section 139 applies in situations where the creditor’s act or omission impairs the surety’s eventual remedy against the principal debtor.
The Court clarified that a modification in the contract does not automatically discharge the surety from the entire obligation.
Instead, the surety remains bound by the original guarantee but is discharged for transactions that occur after the variance.
Background of the Dispute
The dispute dates back to October 30, 1993.
M/s Darshak Trading Company obtained a cash-credit facility of ₹4,00,000 from Bhagyalakshmi Co-Operative Bank. Respondent Nos. 1 and 2 executed guarantee agreements and stood as sureties for this loan.
Later, the borrower allegedly withdrew amounts far beyond the sanctioned limit with the connivance of bank officials.
After the borrower defaulted, the bank filed a suit seeking recovery of ₹26,95,196.75, nearly seven times the sanctioned limit, from the borrower and the sureties.
The Gujarat High Court held that the bank’s decision to allow overdrawing fundamentally altered the contract. On that basis, it discharged the sureties from the entire liability.
Supreme Court Sets Aside High Court Judgment
Allowing the appeal, Justice B.V. Nagarathna, who authored the judgment, held that the sureties remain liable only up to the original guaranteed amount.
The Court explained that Section 133 permits discharge of the surety only for transactions that occur after the variance, not for the entire debt.
The Court observed:
“The surety is discharged only in respect of transactions that occurred subsequent to the variance of the contract. The High Court’s view that the sureties must either be liable for the entire amount or not at all is erroneous.”
The Court further clarified that the statute requires a bifurcation of liability. Sureties remain liable for the original guaranteed amount but are discharged for excess withdrawals made after the contract was altered.
Section 139 Not Applicable
The guarantors also relied on Section 139 of the Contract Act.
However, the Supreme Court rejected this argument. The Court held that Section 139 applies only when the creditor’s conduct impairs the surety’s remedy against the principal debtor.
In this case, although the bank allowed withdrawals beyond the sanctioned limit, the Court found no impairment of the sureties’ legal remedy against the borrower.
Therefore, Section 139 did not apply.
Final Ruling
The Court concluded that the guarantors remain liable only up to the original loan amount of ₹4,00,000 along with applicable interest.
The sureties stand discharged only for the excess withdrawals made after the variance in the loan terms.
Accordingly, the Supreme Court allowed the appeal and set aside the Gujarat High Court judgment.
Case: Bhagyalaxmi Co-Operative Bank Ltd. v. Babaldas Amtharam Patel (D) through LRs & Others
