Continuing Guarantee, Unilateral Enhancement of Limit and the Surety's Discharge
In March 2023 Anand, promoter of Sundar Textiles Pvt Ltd, executed a deed of guarantee in favour of Northstar Bank for a cash credit facility of ₹75 lakh sanctioned to the company. The deed guaranteed 'all amounts now due or hereafter to become due, together with interest, subject to a maximum of ₹75 lakh', and said it would 'remain in force until revoked by written notice'. In August 2024 the bank, without Anand's knowledge or consent, raised the limit to ₹1.10 crore and granted the company a nine-month moratorium on principal repayment. Anand was not informed of either change. In January 2025 the account became an NPA with ₹1.42 crore outstanding. The bank sold hypothecated stock for ₹30 lakh and appropriated ₹12 lakh from the company's fixed deposit. It now demands ₹1.10 crore plus interest from Anand, arguing that a continuing guarantee covers all future advances and cannot be revoked retrospectively. The stock hypothecation and the fixed deposit both existed when Anand signed. The outstanding on the date of the variation was ₹68 lakh.
1. Analyse the extent of Anand's liability, if any, having regard to ss.128 to 137 of the Indian Contract Act, 1872.
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Starting point - extent of liability. Section 128 makes the surety's liability co-extensive with that of the principal debtor unless the contract otherwise provides. Here the deed itself caps liability at ₹75 lakh, so the bank can never recover more than that from Anand, whatever the sanctioned limit becomes. The 'all amounts hereafter to become due' wording makes this a continuing guarantee under s.129.
First variation - enhancement of limit. Section 133 provides that any variance in the terms of the contract between the principal debtor and the creditor, made without the surety's consent, discharges the surety as to transactions subsequent to the variance. Increasing the limit from ₹75 lakh to ₹1.10 crore is not a clerical change; it is a material variation because it alters the risk the surety agreed to bear. Anand is therefore discharged from liability for advances made after August 2024.
Second variation - moratorium. Section 135 provides that a contract between the creditor and principal debtor by which the creditor makes a composition with, promises to give time to, or promises not to sue the principal debtor, discharges the surety unless the surety assents. A binding nine-month moratorium is a promise to give time. It is not mere forbearance, which under s.137 would not discharge the surety. This variation independently discharges Anand.
Revocation argument. Section 130 permits revocation of a continuing guarantee as to future transactions by notice; the bank is right that revocation is prospective, but that point is irrelevant because the discharge flows from ss.133 and 135, not from revocation.
Conclusion. Anand is discharged. At the lowest, he is liable only for the pre-variation balance of ₹68 lakh, less realisations credited, and in no event beyond ₹75 lakh. The bank must look to the company and to those who authorised the enhancement; Anand should also seek indemnity from the company under s.145.
2. How must the bank apply the ₹30 lakh realised from the hypothecated stock and the ₹12 lakh from the fixed deposit, and what is Anand's net exposure?
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Surety's right to securities. Section 141 provides that a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time the contract of suretyship was entered into, whether or not the surety knew of it; if the creditor loses or parts with such security without the surety's consent, the surety is discharged to the extent of the value of the security. Section 140 gives the surety subrogation on payment.
Application here. Both the stock hypothecation and the company's fixed deposit existed when Anand signed, so both are securities to whose benefit he is entitled. The bank was, in effect, a trustee of these securities for Anand. By realising them rather than losing them, the bank has done what it was entitled to do, but it must credit the entire ₹42 lakh against the guaranteed debt. It cannot appropriate the realisations only to the post-variation advances and then claim the pre-variation balance in full; appropriation that unfairly prejudices the surety is not permissible.
Computation. Pre-variation outstanding ₹68,00,000. Realisations ₹42,00,000 credited. Net exposure ₹26,00,000, being within the ₹75 lakh ceiling. No interest can be loaded beyond the terms of the guarantee deed, and the moratorium period cannot be used to inflate the surety's liability.
Had the bank released the securities - for example, released the hypothecation while restructuring - Anand would be discharged pro tanto to the value of the security lost, in addition to his rights under ss.133 and 135.
Conclusion. Anand's maximum exposure is ₹26 lakh plus contractual interest up to ₹75 lakh. The demand for ₹1.10 crore is unsustainable on three independent grounds: the contractual cap, the s.133 variance, and the s.135 moratorium.
3. Would your advice change if the deed had contained a clause by which Anand consented in advance to any enhancement of the limit or extension of time granted by the bank?
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Effect of a consent clause. Sections 133 and 135 operate only where the variance or the giving of time is 'without the surety's consent'. A properly drafted clause by which the surety consents in advance to variations, including enhancement of limits and rescheduling, displaces both sections. On that hypothesis Anand would remain liable and the bank's demand would survive the variations.
But consent clauses are construed strictly. Three limits matter. First, the clause must cover the specific variation actually made; a general consent to 'rescheduling' may not authorise a doubling of the sanctioned limit, and a consent to 'variations in the facility' may not authorise a moratorium of nine months coupled with a higher limit. Second, the clause is construed contra proferentem against the bank, which drafted it. Third, the monetary cap in the deed is a separate and specific bargain; a general consent to future variations does not enlarge the ₹75 lakh maximum, because a cap is the very term that defines the risk the surety accepted. The bank cannot use a consent clause to convert a capped guarantee into an open-ended one.
Duty of disclosure. Even with a consent clause, the bank owes a duty to disclose material facts at the inception of the guarantee. Consent clauses do not license concealment of facts that make the contract something different from what the surety believed it to be.
Revised conclusion. With an appropriately worded and specific consent clause, Anand remains liable for the company's dues up to ₹75 lakh, computed after crediting the ₹42 lakh realisations, subject to interest according to the deed. Without it, or if the clause is too general to cover the enhancement, the earlier conclusion of discharge stands. The bank's paper should therefore be examined for the exact width of the consent clause before any settlement is negotiated.