1. Two Different Discharges - Don't Confuse

A. Discharge of Principal Debtor - Sec 62

If Creditor and Principal Debtor by mutual consent vary the contract, original contract is discharged. New contract substitutes.

Three forms:

1. Novation: Substitution of new contract for old with same parties or different parties. Example: A owes B Rs 10 lakh. A, B, C agree B will accept C instead of A. Old contract discharged.
2. Rescission: Both parties agree to cancel old contract.
3. Alteration: Parties change one or more terms with consent of all parties. Old contract discharged by alteration.

Essential requirement: Complete substitution. Minor indulgence is not variation.

Supreme Court - Lata Construction & Ors v Dr. Rameshchandra Ramniklal Shah - AIR 2000 SC 380 - Leading case on Sec 62

Held: One of the essential requirements of novation as contemplated by Section 62 is that there should be complete substitution of a new contract in place of the old. It is only where such substitution is complete - rescinding, altering or extinguishing previous contract in its entirety, that original contract need no longer be performed.

If variation is not complete, original contract continues.

B. Discharge of Surety / Guarantor - Sec 133 - The Banking Impact

This is where banks lose cases.

Section 133: Discharge of surety by variance in terms of contract
"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."

Principle: Surety is only liable for terms agreed upon by him. If creditor and principal debtor make any changes without informing or consulting surety, he will be immediately released.

Examples of variance that discharge surety:

• Enhancing credit limit from Rs 10 lakh to Rs 20 lakh without surety consent
• Extending repayment period
• Changing interest rate
• Changing security
• Giving extra time - Sec 135 also

Exceptions where surety NOT discharged:

1. Variation is insubstantial or for benefit of surety
2. Surety gave prior consent to variation in guarantee deed - Most modern Bank guarantee deeds have clause: "Surety agrees to variation, extension, renewal without notice" - This saves bank.
3. Internal account instructions are not variation.

2. Leading Case Laws

1. Amrit Lal Goverdhan Lalan v State Bank of Travancore - AIR 1968 SC 1432 - Discharge of Surety under Sec 133 & 141

Central issues revolved around whether contractual variations without surety's consent and conduct of creditor could discharge surety. Court clarified that internal account instructions or unilateral variations in credit limit without surety's consent did not discharge surety under Section 133? Actually in this case court held: If credit limit enhanced internally without fresh consent, surety discharged for enhanced portion. Clarified Sec 141 - creditor losing security also discharges surety.

2. Corporation Bank vs Mohandas Baliga - 1992 - Karnataka HC

Pearl Hosiery Mills case was a case in which without consent of surety variations were made in terms of original contract. Therefore in view of Section 133 it was held that surety stood discharged

Facts: Cash credit limit increased, stock statements altered. Surety not informed. Held discharged.

3. Brs Ventures Investments Ltd vs Srei Infrastructure Finance Ltd - NCLAT 23 July 2024

He submitted that any variation in contract between creditor and principal debtor without guarantor's consent amounts to discharge of guarantor as regards transactions subsequent to variance. He pointed out various provisions of Contract Act regarding discharge of guarantor

NCLAT reaffirmed Sec 133 applies even in IBC proceedings.

4. M.S. Anirudhan v Thomco's Bank - AIR 1963 SC 746

Overdraft account allowed to fluctuate. Bank allowed principal debtor to overdraw beyond guarantee limit without surety consent. SC held surety discharged under Sec 133 as variance was material.

5. Bonar vs Macdonald - English - Cited in Indian Courts

Alteration must be material. If change materially affects position of surety, then it would absolve surety from liability. However guarantor is not discharged by any variation made with his consent.

6. Lata Construction principle applied to OTS - One Time Settlement

Vinod Kothari analysis: Novation under Section 62 requires complete substitution of new contract in place of old one. Supreme Court in Lata Construction held it is only where substitution is complete - rescinding, altering, or extinguishing previous contract in its entirety, that original contract need no longer be performed

So, OTS that substitutes old loan with new payment schedule is novation under Sec 62 - old contract discharged. Bank cannot then enforce old higher interest.

3. How Banks Save Themselves?

Banks now draft guarantee deed with:

"The guarantor agrees that any variation, extension, renewal, OTS, enhancement, reduction, change in interest, giving of time, shall not discharge guarantor and guarantor consents in advance to such variation under Sec 133."

Courts have upheld this advance consent - See Industrial Finance Corporation of India vs Cannanore Spinning - SC.

But if guarantee deed does not have this clause, any variance without consent = Full discharge for future transactions.

Practical Checklist to Claim Discharge:

1. Identify original contract terms
2. Show variance made between creditor and principal debtor - letter, enhanced sanction, rescheduling
3. Show no consent from surety - no counter-signature
4. Show variance material - affects risk
5. File under Sec 133 + Sec 135.