When the liability of surety, which he had undertaken under a contract of guarantee, is extinguished or comes to an end, he is said to be discharged from liability. The modes of discharge of a surety, as recognized by the Indian Contract Act, are as under:
1. Revocation by the surety. (Section 130).
2. By surety’s death. (Section 131).
3. By variance in the terms of the contract. (Section 133).
4. By release or discharge of principal debtor. (Section 134).
5. When creditor compounds with, gives time to, or agrees not to sue, the principal debtor. (Section 135).
6. By creditor’s act or omission impairing surety’s eventual remedy. (Section 139).
7. By loss of the security by the creditor. (Section 141).
The above stated modes of discharge of surety are being discussed below:
1. By revocation by the surety (Section 130).
According to Section 130:
“A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.”
This Section permits revocation of guarantee by the surety:
(i) when it is a continuing guarantee; and
(ii) as regards future transactions only.
This can be done by a notice by the surety to the creditor in that regard. Once notice revoking guarantee is issued, the liability of the surety would fasten only upto that date and not thereafter.[ T.N. Industrial Investment Corpn. Ltd. v. Sudarsnam Industries, A.I.R. 2009 Mad. 15.]
The following illustrations (a) to Section 130 make it clear that when the surety gives a notice of revocation, his liability continues to exist for the transactions already made, but is revoked as regards future transactions, i.e., the transactions made subsequent to the notice.
Read Also What is Contract of Guarantee?
A, in consideration of B’s discounting at A’s request, bill of exchange for C guarantees to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts bill for C to the extent of 2,000 rupees. Afterwards, at the end of three months, A revokes the guarantee. This revocation discharges C from all liability to B for any subsequent discount. But A is liable to B for the 2,000 rupees, on default of C.
When a transaction has already been made, surety’s liability with regard to that transaction cannot be revoked by a subsequent notice. The point may be explained by referring to the following illustrations (b) to Section 130:
A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. A is liable upon his guarantee.
The point may be further explained by the case of Offord v. Davies (1862) 12 C.B.N.S. 748 133 R.R. 491 In this case, A promised in favour of B that if B discounted bill for C, A would guarantee the payment of bills to the extent of £ 600, during a period of 12 calendar months. Some bills were discounted by B and the payment for the same was made. Thereafter, A gave a notice to B that A would no more guarantee the discounting of any bills. In spite of the notice, B continued to discount bills. The bills not having been paid, B sued A for the same. It was held that A could not be made liable as a surety for the bills discounted by B, after A’s notice to B.
Revocation as to future transactions is possible, when there are separate distinct transactions contemplated in the contract. When the consideration is single and indivisible, for instance, where continued relationship is established on the faith of a certain guarantee, no revocation of the same is possible. Thus, if a servant is employed on the basis of a guarantee as to his good conduct, the guarantee is not revocable so long as the servant continues in service.
In Sita Ram Gupta v. Punjab National Bank A.I.R. 2008 S.C. 2416, the agreement of guarantee read as: “The guarantors hereby declare that this guarantee shall be a continuing guarantee and shall not be considered as cancelled or in any way affected by the fact that at any time the said accounts may show no liability against the borrower or may even show a credit in his favour but shall continue to be guarantee and remain in operation in respect of all subsequent transactions.” The appellant having entered into an agreement of guarantee with the respondent bank revoked by a letter written to the Manager of the Bank, before the loan was in fact advanced by the bank. Referring to the manner in which the agreement was entered into, it was held that it was not open to the appellant to revoke the guarantee. The Apex Court said that the agreement not being unlawful, would override the statutory provision contained in Section 130 of the Contract Act, 1872, since he had waived the benefit of Section 130 by entering into agreement of guarantee with the bank. The appellant was thus held not entitled to deny liability to pay the debt advanced by the bank.
2. By surety’s death (Section 131)
According to Section 131:-
“The death of a surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.”
The effect of the death of the surety is that it results in automatic revocation of the continuing guarantee as to future transactions. There may, however, be no revocation of guarantee on the death of the surety, if there is a contract to that effect. For example, in a contract of guarantee, it is stipulated that on the death of the surety, his property or his legal representatives will be responsible for such liability. In such a case, the guarantee is not revoked even if the surety dies.
Read Also Nature and Extent of Liability of Surety
3. By variance in the terms of contract (Section 133)
When the surety has undertaken liability on certain terms, it is expected that they will remain unchanged during the whole period of guarantee. If there is any variance in the terms of the contract between the principal debtor and the creditor, without the consent of the surety, the surety gets discharged as regards transactions subsequent to such a change. The reason for such a discharge is that the surety agreed to be liable for a contract which is no more there, and he is not liable on the altered contract because it is different from the contract made by him. Section 133, which makes a provision in this regard, is as follows:
“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.”
Section 133 has been explained with the help of the following illustrations :
(a) A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract, without A’s consent that B’s salary shall be raised and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss.
(b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under his guarantee, though the misconduct of B is in respect of a duty not affected by the later Act.
(c) C agrees to appoint B as his clerk to sell goods at yearly salary, upon A’s becoming surety to C for B’s duly accounting for money received by him as such clerk. Afterwards, without A’s knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary. A is not liable for subsequent misconduct of B.
(d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to B on credit. Afterwards, B becomes embarrassed, and, without the knowledge of A, B and C contract that C shall continue to supply B with oil for ready money, and that the payments shall be applied to the then existing debts between B and C. A is not liable on his guarantee for any goods supplied after this new arrangement.
(e) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the 5,000 rupees to B on the 1st January. A is discharged from his liability, as the contract has been varied, inasmuch as C might sue B for the money before the first of March.
In Bonar v. Macdonald (1850) 3 H.L.C. 226, the defendant was a surety for the conduct of a bank manager. Subsequent to this agreement, the bank enhanced manager’s salary and the manager agreed to be liable for 1/4 of the losses on discounts allowed by him. This arrangement between the bank and its manager had been made without the knowledge of the surety. It was held that this arrangement had resulted in the discharge of surety. Lord Cottenham observed:
“Any variance in the agreement to which the surety has subscribed, which is made without the surety’s knowledge or consent, which may prejudice him, or which may amount to a substitution of a new agreement for a former agreement, even though the original agreement may, notwithstanding such variance, be substantially performed, will discharge the surety.”
One such illustration where variance in the contract would discharge the surety, is found in the Indian Partnership Act. According to Section 38 of that Act, a continuing guarantee given to a partnership firm, or to a third party in respect of the transactions of a firm is revoked as to future transactions from the date there is a change in the constitution of the firm. The reason for this provision in the Indian Partnership Act is that every guarantee given in relation with a partnership firm is on the assumption that the constitution of the firm will remain unchanged during the period of guarantee. If in spite of such a change, the guarantee already given is to continue, the parties are free to make a contract to that effect.
If there is a written contract of guarantee and there is no variance of the same in writing, the validity of the contract is not affected. In Amrit Lal v. State Bank of Travancore A.I.R. 1968 S.C. 1432, the credit limit of the debtor, which had been fixed at Rs. 1,00,000 was first reduced to Rs. 50,000 and then again raised to Rs. 1,00,000 without consulting the surety. This was done by oral instructions to the cashier only (and not by altering any document). It was held that in this case there was no variation in the terms of the contract within the meaning of Section 133, and, therefore, the surety had not been discharged thereby.
In Anirudhan v. Thomco’s Bank A.I.R. 1963 S.C. 746, the alteration was not prejudicial to the interest of the surety, and the question which had arisen was whether the surety was discharged in such a case. The facts of the case are as follows:
The appellant agreed to stand as surety to the tune of Rs. 25,000 for an overdraft to be allowed by the respondent bank to the principal debtor, Shankran. The bank agreed to allow the overdraft only for Rs. 20,000 and not for Rs. 25,000. The principal debtor altered this amount of guarantee from Rs. 25,000 to Rs. 20,000. The alteration in this case, which was made by the principal debtor, was not to the prejudice of the surety. The question before the Supreme Court was whether such an alteration, which was to the benefit of the surety, had discharged the surety. The majority decision (2 : 1) was that when the alteration is to the benefit of the surety, that is not a material alteration. Such an alteration is unsubstantial and that does not discharge the surety from liability. Hidayatullah, J.
observed :
“The question before me is whether a document jointly executed by two persons creating a liability equal for both is to be regarded as materially altered if the liability is reduced equally for both but the alteration is made only by one of them. In my opinion, such an alteration be regarded as unsubstantial and not otherwise….In my judgment, the particular document, in this case, cannot be said to have been
materially altered…The alteration does not save the surety from liability arising under it.” The majority view does not appear to be convincing. Whether the alteration is material or not should not depend on the fact whether it was beneficial or prejudicial to the surety. The minority view expressed by Sarkar, J. appears to be in consonance with the provision contained in Section 133.
It may be submitted that this decision does not appear to be logical interpretation of Section 133. According to Section 133, “Any variance” in the contract, made without surety’s consent discharges the surety. The Act does not draw any distinction between the variances beneficial or prejudicial to the surety in material particulars as compared to the original one. If the terms of the contract are changed, the person who signed the original contract cannot be made liable either on the basis of the original contract, because that has been destroyed by alteration, or on the basis of altered contract,
because he never agreed to that.
Read Also Continuing Guarantee
Novation of Contract
In Satish Chandra Jain v. National Small Scale Industries Corpn. Ltd. A.I.R. 2003 S.C. 623, the appellant stood as guarantor to funding done to his son’s property business venture. Later on, the son converted his proprietary business into private limited company. The respondent-creditor gave his consent to such change and fresh agreement was entered into under which the company became hirer and appellant’s son with one another became guarantors. On default by company, suit for recovery was filed against it and the two guarantors under the subsequent agreement but appellant was not made a party to the suit. Plaint neither referred to the first agreement of guarantee nor asked any relief against the appellant. The Apex Court held, that inclusion of property of appellant recovery certificate issued was not proper because subsequent agreement amounted to novation of contract by which the guarantee of appellants stood discharged.
4. By release or discharge of the principal debtor (Section 134).
The provision concerning the discharge of the surety on the release or discharge of the principal debtor as contained in Section 134 and its illustrations is as under:
“134. Discharge of surety by release or discharge of principal debtor. The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
Illustrations
(a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by the contract with C, and A is discharged from his suretyship.
(b) A contracts with B to grow a crop of indigo on A’s land and to deliver it to B at a fixed rate, and C guarantees A’s performance of this contract. B diverts a stream of water which is necessary for irrigation of A’s land, and thereby prevents him from raising the indigo. C is no longer liable on his guarantee.
(c) A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber, C is discharged from his suretyship.”
It has already been noted that according to Section 128, the liability of the surety is coextensive with that of the principal debtor. Therefore, if by any contract between the creditor and the principal debtor, the principal debtor is released, or by any act or omission of the creditor, the principal debtor is discharged, the surety will also be discharged from his liability accordingly.
Another reason for the discharge of the surety on the release or discharge of the principal debtor is as follows. According to Section 140, after payment or performance of his obligation, the surety can seek reimbursement from the principal debtor. If the principal debtor is no more liable, the surety’s remedy would be affected thereby. If surety’s remedy against the principal debtor is affected, that should also result in the discharge of the surety.
Where there are co-sureties, a release by the creditor of one of them does not discharge the others.(Section 138)
Even if one of the co-sureties is released by the creditor, he does not thereby become released from his responsibility to contribute to the other sureties.(Section 146)
No discharge after the decree is passed
In Charan Singh v. Security Finance Pvt. Ltd. A.I.R. 1988 Delhi 130 the question before the Delhi High Court was whether a settlement between the creditor and the principal debtor after a joint decree has been passed against the principal debtor and the surety would result in the discharge of the surety. It was held that the provisions of Sections 133 to 139 apply only where the rights of the parties have not crystallized and merged in a decree of the Court, and they do not apply to the judgment-debtors.
In the above case, the creditor obtained a decree for Rs. 30,155 jointly against the two principal debtors and the surety. After that, the creditor entered into an agreement with one of the principal debtors that if he paid a sum of Rs. 10,000/-, the creditor (decree-holder) will not proceed further against him. After this amount had been paid, the creditor sought to recover the balance from the surety. It was held that such a compromise after the decree had been passed did not discharge the surety and, therefore, the creditor was held entitled to recover the balance of the amount from the surety.
Since the liabilities of principal debtor and guarantors was independent of each other; as responsibility to repay loan was joint and several, hence same could be enforced against guarantors even without initiating any proceedings against principal debtor.
5. When creditor compounds with, gives time to, or agrees not to sue the principal debtor (Section 135)
Section 135 mentions further circumstances when a contract between the creditor and the principal debtor can result in the discharge of the surety. The Section is as under:
“135. Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor-A contract between the creditor and the principal debtor by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.”
According to this Section, a contract between the creditor and the principal debtor discharges the surety in the following three circumstances :-
(i) When the creditor makes composition with the principal debtor;
(ii) When the creditor promises to give time to the principal debtor; and
(iii) When the creditor promises not to sue the principal debtor.
It may be noted that in the above stated circumstances, the surety is discharged if the creditor and the principal debtor make such contract without the consent of the surety. If such a contract is made with the consent of the surety, he would not be discharged.
(i) Creditor compounding with the principal debtor
When the creditor makes compositions with the principal debtor without the consent of the surety, this means variation in the original contract. Its obvious consequence, therefore, is the discharge of the surety from the liability. For example, A borrows Rs. 10,000 from B. C stands as a surety as regards the repayment of loan by A to B. Thereafter, A and B agree that A may repay Rs. 5,000 instead of Rs. 10,000. C is thereby discharged from liability as a surety.
(ii) Creditor promising to give time to the principal debtor
Promise to give time to the principal debtor means extending the period of payment which was not contemplated in the contract of guarantee. The surety expects that the creditor will take the performance from the principal debtor without any delay. If the creditor causes the delay by giving more time to the principal debtor and then the surety is asked to be liable on the debtor’s default, this would delay the surety’s action for reimbursement against the principal debtor, and, therefore, such an arrangement works to the prejudice of the surety.
In Samuel v. Howarth, 3 Mer. 272, it was held that when the creditor gives time to the principal debtor without the consent of the surety, the surety is discharged even though the extension of time is for the benefit of the surety. The reason for suing his urge was thus explained by the Privy “A surety is discharged if the creditor, without his consent, either release the principal debtor or enterns in to a binding agreement with him to give him time. In each case, the ground of discharge is that the surety’s right to pay the debt at any time and after paying it, to sue the principal in the name of the creditor is interfered with.”
In Kurian v. The Alleppey C.C.M.S. Society A.I.R. 1975 Kerala 44, the creditor filed a suit against the debtor for the recovery of some money due from the debtor. Then there was a compromise between the two parties to the suit according to which the debtor was allowed to pay the decretal money within nine months from the date of compromise. This happened without the knowledge or consent of the surety. It
was held that this arrangement meant giving time to the debtor within the meaning of Section 135, and the surety was, therefore, discharged from his liability.
Agreement by the creditor with the principal debtor to take the payment in instalments instead of in lump sum, amounts to giving time to the principal debtor and that results in the discharge of the surety. The position is the same even after a joint decree is passed against the principal debtor and the surety. Thus, if after the passing of the decree, the creditor decree-holder without the consent of the
surety, grants instalments to the principal debtor, that amounts to giving time to the principal debtor and the surety is thereby discharged.( Maharashtra Apex Corp. v. Poovappa Salian, A.I.R. 1985 Kant. 116)
For the discharge of the surety under Section 135, it is necessary that there should be a contract between the creditor and the principal debtor whereby the creditor gives time to the principal debtor. Where a contract to give time to the principal debtor is made by the creditor with a third person and not with the principal debtor, the surety is not discharged.( Section 136)
For example, C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time to B, A is not discharged. In this illustration, C, who is the creditor agrees with a third party (M) to give time to the principal debtor (B). Even though the same is without the consent of the surety but that does not discharge the surety (A).
(iii) Creditor promising not to sue the principal debtor
A contract between the creditor and the principal debtor whereby the creditor promises not to sue the principal debtor, also results in the discharge of the surety. The surety has a right to sue soon after the payment becomes due, the creditor will take action against the principal debtor to recover the same. Therefore, the promise by the creditor not to sue the principal debtor is inconsistent with the right of the surety, and, therefore, this results in the discharge of the surety.
Mere forbearance to sue not enough
Although a promise by the creditor not to sue the principal debtor discharges the surety, but a mere forbearance to sue on his part does not discharge the surety. The reason is that by promising not to sue, the creditor’s right of suing is given up and the right to sue is thereby extinguished, whereas by mere forbearance to sue, the right to sue can still be exercised. Section 137 explains the position in this regard in the following words:
“137. Creditor’s forbearance to sue does not discharge surety.-Mere forbearance on the part of the creditor to sue the principal debtor, or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety.
Illustration
Bowes C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his suretyship.”
Forbearance to sue until the end of the period of limitation
Sometimes, there is forbearance to sue the principal debtor by the creditor for such a long time that because of the law of limitation, the action against the principal debtor becomes time barred. In such a case, the question which arises is that whether the surety is discharged in such a situation.
Under English law, in such a situation, the surety is not discharged.( Carter v. White, (1883) 25 Ch. D. 666.) There are two reasons for it. Firstly, even though the action becomes time barred, it does not result in the complete extinction of the debt. Secondly, even though the creditor’s right of action against the principal debtor may not be possible, “the surety can himself set the law in operation against the debtor”.(Lindley, L.J.)
The majority of the High Courts in India in their decisions have also adopted the same position and held that even though by forbearance to sue by the creditor, the action against the principal debtor is time barred, the surety is not discharged thereby.
In Mahanth Singh v. U Ba Yi, A.I.R. 1939 P.C. 110, the Privy Council has also expressed in favour of the view adopted by a large number of High Courts as stated above, and has held that failure to sue the principal debtor until recovery is barred by the statutes of limitation and does not operate as discharge of the surety.
6. By creditor’s act or omission impairing surety’s eventual remedy (Section 139)
Section 139 incorporates the rule that when the act or omission on the part of the creditor is inconsistent with the interest of the surety, and the same results in impairing surety’s eventual remedy against the principal debtor, the surety is discharged thereby. Section 139 is as follows:
“139. Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy. If the creditor does any act which is inconsistent with the right of the surety, or omits to do an act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.”
According to Section 140, the surety after making the payment which may have become due on performing the duty, on the default of the principal debtor, is invested with all the rights which the creditor had against the principal debtor. If the creditor makes an act or omission the effect of which is to impair surety’s remedy against the principal debtor, the surety is discharged. This may be explained with the help of the following illustrations:
(a) B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain stages. A becomes surety to C for B’s due performance of the contract. C, without the knowledge of A, prepays to B the last two instalments. A is discharged by this prepayment.
(b) C lends money to B on the security of joint and several promissory note made in C’s favour by B, and by A as surety for B, together with a bill of sale of B’s furniture, which gives power to C to sell the furniture, and apply the proceeds in discharge of the note. Subsequently, C sells the furniture, but, owing to his misconduct and wilful
negligence, only a small price is realized. A is discharged from the liability on the note.
(c) A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on his part that he will, at least once a month, see M make up the cash. B omits to see this done as promised, and M embezzles. A is not liable to B on his guarantee.
In Nirmal Singh Kukreja v. Suraj Gupta A.I.R. 2013 H.P. 23 the plaintiff stood guarantor to funding defendant son-in-law’s proprietary business. The defendant having committed serious defaults in payment of debt due to various financial institutions, the plaintiff negotiated with the Bank, the creditor, for one time settlement. Pursuant to the same, the plaintiff paid amounts claimed for in suit by the Bank. After discharging liability towards the creditor Bank, the plaintiff filed the suit against the defendant claiming the amount he had paid to his creditors alongwith interest @ 18% per annum on payments so made. The plaintiff was held entitled to recover the amount so claimed alongwith interest.
In State of M.P. v. Kaluram A.I.R. 1967 S.C. 1105 the State of M.P. made a contract for the sale of ‘felled trees’ with one Jagat Ram, who was the highest bidder in the auction sale. The payment for these trees was to be made by instalments. Kaluram was a surety for the payment by the purchaser of trees. The purchaser failed to pay the second and subsequent instalments. The State of M.P. did not take any steps to recover this amount, nor did they stop the removal of the felled trees on default of payment. It was held that since the State Govt. had failed to take necessary steps to recover the amount from the purchaser by allowing him to take away the trees, the surety’s remedy against the purchaser (Jagat Ram) had thereby been impaired, the surety (Kaluram) was discharged from his liability.
If the goods are lost without the fault of the creditor, the surety is not discharged thereby.
In M.R. Chakrapani v. Canara Bank A.I.R. 1997 Kant. 216 the property hypothecated to the bank was sold by the principal debtor. The surety immediately furnished the particulars of the sale to the bank, but the bank took no steps either to trace and seize the property or failed to take any action against the principal debtor by lodging a complaint with the police or filing a case in a criminal court for tracing and attachment of property and recovering the dues. It was held that the surety was discharged due to inaction of the bank.
When a bank loses the security deposited with it by the principal debtor due to its negligence, the surety would stand discharged in respect of the loan given by the bank on the basis of security.
In Union Bank of India, Bombay v. S.B. Mehta A.I.R. 1997 Guj. 48., A, a principal debtor, at the time of taking loan from a bank executed a demand promissory note, an agreement of hypothecation of goods and other documents in favour of the said bank, and B stood as surety for the loan granted by the bank to A. The bank sued A and B to recover the amount of loan. It was found that the goods which were the subject-matter of hypothecation had been disposed of by A (the principal debtor) due to inaction and negligence on the part of the plaintiff bank. Due to that, B’s remedy to proceed against A had come to an end, and, therefore, it was held that B was discharged as surety towards the plaintiff bank.
7. By loss of the security by the creditor (Section 141)
According to Section 141, the surety is entitled to all the securities which the creditor has against the principal debtor at the time when the contract of suretyship is entered into. If the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. For instance, the seller of the goods allows the buyer to take away the goods without insisting for the payment of the price for the same, the surety who guarantees the payment of the price by the buyer, is discharged from his liability.
It may be noted that if the creditor does not lose the securities but they are lost without his fault, the surety is not discharged thereby. For instance, when the hypothecated goods are lost without any fault of the creditor, that does not discharge the surety.( R. Lilavati v. Bank of Baroda, A.I.R. 1987 Kant. 2.)
Discharge of Principal Debtor without creditor’s fault does not discharge the surety
According to Section 141, the surety is discharged if the principal debtor gets discharged due to the fault of the creditor. If there is no voluntary act of the creditor in the discharge of the principal debtor, the surety continues to be liable in spite of discharge of the principal debtor.
In I.FC.I. Ltd. v. Cannanore Spg. and Weaving Mills Ltd. A.I.R. 2002 S.C. 1841 ,there was a contract for the supply of textile goods to be manufactured by a certain textile unit. The said textile unit was nationalized and the assets vested in the Government.
The question arose if impossibility of performance of contract by the principal debtor discharged the surety from his liability.
It was held that the surety was not discharged even though the principal was discharged because the discharge of principal debtor was not due to the voluntary act of the creditor. It was observed that the contract of guarantee has no co-relation with the Nationalization Act. It is an independent contract and it is not covered under Section 141 of the Contract Act. The surety continues to be liable in this case.
Substitution of Surety
In case the surety is replaced by a party without the written approval of the creditor, the surety is not discharged. For instance in H.P.S.I.D.C. v. M/s. Manson India Pvt. Ltd. A.I.R. 2009 (NOC) 490 (H.P.)., the defendant company and its promoters had taken loan from the appellant corporation. The promoters unilaterally without waiting for prior written approval from the corporation as was required under the agreement entered into between them, transferred their interest in the company to new Directors and changed management of the company. It was held that the promoters were not absolved of their personal liabilities under the deed of guarantee with the corporation.