Surety, Unilateral Variation and the Release of a Co-surety's Security
In January 2024 Nandini, a retired school teacher, signed a written guarantee in favour of Deccan Mercantile Bank Ltd for the credit purchases of Kirti Traders, her nephew's firm: 'up to a limit of ₹25,00,000, this guarantee to be a continuing guarantee until I give you notice in writing.' The bank sanctioned a cash-credit facility of ₹25,00,000 against the guarantee in February 2024. In August 2024, without informing Nandini, the bank raised the limit to ₹40,00,000 and also advanced a separate ₹10,00,000 term loan to Kirti Traders on a fresh request letter. In October 2024 the bank released a mortgage over a shop that Nandini's cousin Ramaswamy had given as co-surety, after Ramaswamy paid ₹3,00,000 towards the account. Kirti Traders defaulted in February 2025 and the bank's outstanding is ₹47,00,000. On 1 March 2025 Nandini served a written notice revoking the guarantee. She now says her liability is nil, or at most ₹25,00,000, and that the release of Ramaswamy's mortgage has discharged her.
1. What is the effect on Nandini's liability of the bank's unilateral increase of the limit and the fresh ₹10,00,000 term loan?
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Section 133 discharges the surety for subsequent transactions. Any variance, made without the surety's consent, in the terms of the contract between the principal debtor and the creditor discharges the surety as to transactions subsequent to the variance. The bank's August 2024 decision to raise the ceiling from ₹25,00,000 to ₹40,00,000 is precisely such a unilateral variance, made without Nandini's consent.
Consequences. Nandini is discharged from liability for all credit purchases and drawings after August 2024. Because the entire default crystallised in February 2025, the ₹47,00,000 outstanding consists of post-variance transactions and she is not liable for it. Her original guarantee was also capped at ₹25,00,000; under section 128 the surety's liability is co-extensive with that of the principal debtor unless the contract provides otherwise, and a contractual ceiling is a further limit.
The term loan is outside the guarantee altogether. It was a fresh, separate advance on a fresh request letter; a guarantee covers only what it describes, and Nandini never guaranteed a term loan.
Conversely, had the bank merely reduced the limit or altered the interest rate with her consent, the guarantee would have continued. The lesson for the bank is that any enhancement of a guaranteed facility requires the surety's written consent, normally by a fresh guarantee deed.
2. The bank released Ramaswamy's mortgage after he paid ₹3,00,000. Nandini says she is therefore wholly discharged. Is she right? Would it matter if the bank had released the mortgage without receiving anything?
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Release of a co-surety does not by itself discharge the others. Section 138 provides that where there are co-sureties, a release by the creditor of one of them does not discharge the others, nor does it free the released surety from his responsibility to the other sureties. So the mere fact that Ramaswamy was let out of the guarantee does not release Nandini; she would retain a contribution claim against him under section 146.
But the mortgage was also security, and that engages section 141. A surety is entitled to the benefit of every security which the creditor had against the principal debtor at the time the guarantee was entered into; if the creditor loses, or without the surety's consent parts with, such security, the surety is discharged to the extent of the value of that security. The bank parted with Ramaswamy's mortgage without Nandini's consent, so she is discharged to the extent of the value of the security lost, not necessarily in full.
The ₹3,00,000 matters. The bank did not lose the whole security for nothing; it realised ₹3,00,000, which reduces the value of what was given up. Nandini's discharge under section 141 is measured by the value of the security actually lost net of that realisation.
Had the mortgage been released without any payment, the entire value of the security would have been lost and Nandini's discharge would be correspondingly larger - a classic section 141 outcome that banks ignore at their peril.
3. What is the legal effect of Nandini's written notice of revocation dated 1 March 2025?
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Section 130 makes revocation prospective only. A continuing guarantee may be revoked at any time by the surety by notice to the creditor as to future transactions; it does not retrospectively wipe out liability already incurred. Section 131 applies the same principle to the surety's death.
Applying it here, the notice achieves nothing. The guarantee itself was expressly 'continuing until I give you notice in writing', so the mode of revocation was contractually contemplated - but the entire default had already occurred in February 2025, before the notice. The revocation operates only on transactions entered into after 1 March 2025, and there are none. Nandini remains answerable to the same extent as before the notice, subject to her section 133 and section 141 defences discussed above.
Practical point. Revocation under section 130 must reach the creditor; a notice merely drafted or dispatched but never received is ineffective. Nandini should also have demanded a statement of account after the August 2024 enhancement if she wished to preserve her position. A surety who wants to limit exposure must act before the principal debtor draws further, not after default.