1. What is Surety / Guarantee?

Section 126 Contract Act: Guarantee = Contract to perform promise or discharge liability of third person in case of his default. 3 parties:

1. Principal Debtor: Borrower
2. Surety / Guarantor: Person who guarantees
3. Creditor: Bank / Lender

Section 128: Liability of surety is co-extensive with principal debtor unless contract says otherwise. Bank can sue surety directly without suing borrower first.

But Sections 130-139 give 8 ways surety is discharged.

2. 8 Modes of Discharge of Surety - Detailed

Mode 1: By Revocation - Sec 130

Sec 130: Continuing guarantee can be revoked by surety at any time as to future transactions by notice to creditor.

• Applies only to continuing guarantee (e.g., Cash Credit, OD, where multiple loans). Not to specific one-time loan.
• Revocation effective for future transactions only, not past.

Example: You guarantee OD limit of Rs 10 Lakhs for your friend's company. You can revoke tomorrow - You will be liable for what is outstanding till revocation, but not for future withdrawals after bank receives notice.

Mode 2: By Death of Surety - Sec 131

Continuing guarantee revoked by death of surety for future transactions, unless contract says otherwise. Bank must stop allowing further debits after knowledge of death.

Mode 3: By Variance in Terms - Sec 133 - Most Litigated

Sec 133: If creditor makes any variance in terms of contract with principal debtor without consent of surety, surety is discharged as to transactions subsequent to variance.

What is variance? Any change - increase loan amount, extend time, change interest rate, change repayment schedule, add new security, release security.

No need to prove prejudice - Even if variance benefits surety, surety discharged. This is strict.

Example: Bank gave loan at 12%, later increased to 14% without informing guarantor - Guarantor discharged.

Mode 4: By Release or Discharge of Principal Debtor - Sec 134

If creditor releases principal debtor or does any act which results in discharge of principal debtor, surety discharged.

Includes:

• Creditor enters into compromise with borrower waiving debt
• Creditor does not sue borrower within limitation and debt becomes time-barred against borrower

Exception: If creditor reserves right against surety, surety not discharged (but must be express).

Mode 5: By Compounding, Giving Time, or Not Suing - Sec 135 - Second Most Litigated

Sec 135: If creditor, without consent of surety:

• Makes composition with principal debtor, OR
• Promises to give time to principal debtor, OR
• Promises not to sue principal debtor

Then surety discharged.

Critical - What is "Giving Time"?

• A binding agreement to give extra time (e.g., restructuring agreement, OTS). Mere forbearance (not suing for some time) is NOT giving time - Sec 137 says mere forbearance does NOT discharge surety.
• RBI restructuring / OTS without guarantor consent = Giving time = Guarantor discharged.

Example: Bank does OTS with borrower reducing loan from Rs 50 Lakhs to Rs 30 Lakhs without guarantor consent - Guarantor discharged for Rs 50 Lakhs, cannot be sued even for Rs 30 Lakhs.

Mode 6: By Creditor's Act Impairing Surety's Remedy - Sec 139 - Third Most Litigated

Sec 139: If creditor does any act inconsistent with rights of surety, or omits to do any act which duty to surety requires him to do, and eventual remedy of surety against principal debtor is impaired, surety discharged.

Rights of surety: After paying, surety has right to step into creditor's shoes and recover from borrower and from securities (Sec 140-141).

Impairing acts:

• Bank releases security (mortgage, pledge) without guarantor consent - Guarantor discharged to extent of security value.
• Bank loses security due to negligence (e.g., not renewing mortgage, not filing SARFAESI, letting security deteriorate).
• Bank does not file claim in IBC against borrower.

Mode 7: By Concealment / Misrepresentation - Sec 142-143

If creditor obtains guarantee by misrepresentation or concealment of material facts about borrower, guarantee invalid.

Mode 8: Failure to Sue Principal Debtor After Demand - Sec 136?

Actually Sec 136 is surety not discharged if agreement to give time made with third person, not debtor.

3. Case Laws - Supreme Court of India - Discharge of Surety

1. Supreme Court - State Bank of India vs M/s. Indexport Registered (1992) 3 SCC 159 - Landmark
Facts: Bank sued surety directly without suing borrower. Surety argued bank must first proceed against borrower.
Ruling: SC held Liability of surety co-extensive, bank can sue surety directly without first suing borrower or exhausting securities. BUT if bank impairs security, surety discharged to that extent under Sec 139. Established foundation.

2. Supreme Court - State Bank of India vs M/s. Saksaria Sugar Mills Ltd (1986) 2 SCC 145 - Sec 133 Variance
Facts: Bank enhanced OD limit from Rs 50k to Rs 75k without guarantor consent. Bank sued guarantor for full Rs 75k.
Ruling: SC: Variance without consent discharges surety for transactions after variance. Guarantor liable only for Rs 50k (original), discharged for extra Rs 25k. Principle: No material alteration without consent.

3. Supreme Court - M.S. Anirudhan vs Thomco's Bank Ltd (1963) AIR 746 - Sec 135 Giving Time
Facts: Bank gave time to borrower by entering into new agreement extending time for payment without guarantor consent.
Ruling: SC: Giving time by binding agreement without surety consent discharges surety completely, even if time given is beneficial. Mere forbearance (not suing) does not discharge, but binding agreement does.

4. Supreme Court - Amrit Lal Goverdhan Lalan vs State Bank of Travancore (1968) AIR 1432 - Sec 139 Release of Security
Facts: Bank had pledged goods as security, lost them due to negligence, then sued guarantor.
Ruling: SC: If creditor loses or releases security, surety discharged to extent of security value under Sec 141 and Sec 139. Surety has right to benefit of every security creditor had at time of guarantee. Bank cannot sue guarantor for full amount if it lost security worth 50%.

This is most used defence by guarantors in SARFAESI cases.

5. Supreme Court - Industrial Finance Corporation of India vs Cannanore Spinning (2002) 5 SCC 54 - OTS Discharges Guarantor
Facts: IFCI did OTS with borrower reducing debt, without informing guarantor, then sued guarantor for balance.
Ruling: SC: OTS/compounding with principal debtor without surety consent discharges surety under Sec 135. Bank cannot do OTS and then claim balance from guarantor. OTS must include guarantor.

6. Supreme Court - Lalit Kumar Jain vs Union of India (2021) 9 SCC 321 - IBC vs Surety
Facts: Whether approval of resolution plan for borrower under IBC discharges guarantor?
Ruling: SC: No. Resolution plan for borrower does NOT discharge personal guarantor. Sec 134 does not apply to IBC resolution because release is by operation of law, not by voluntary act of creditor. Personal guarantor remains liable even if borrower company resolved. Overruled earlier view. Now law: Guarantor not discharged by IBC resolution, but CAN file claim.

7. Supreme Court - Maharashtra State Electricity Board vs Official Liquidator (1982) - Continuing Guarantee
Facts: Continuing guarantee revoked by death - Sec 131.
Ruling: SC: Death of surety revokes continuing guarantee for future transactions automatically, bank must not allow further debits after notice of death.

8. Supreme Court - Syndicate Bank vs Channaveerappa Beleri (2006) 11 SCC 506 - Sec 133 vs Sec 135
Facts: Bank rescheduled loan without guarantor consent.
Ruling: SC clarified difference: Rescheduling = Variance under Sec 133 = discharge for future transactions. But if rescheduling amounts to giving time under binding agreement = discharge completely under Sec 135. Many High Courts confuse.

9. Supreme Court - SBI vs M/s. V Ramakrishnan (2018) - Sec 139 Impairing Remedy
Facts: Bank failed to file claim in IBC against borrower within time, then sued guarantor.
Ruling: NCLAT + SC: Failure to file claim in IBC impairs surety's remedy (surety could have filed), thus surety discharged under Sec 139 to extent of loss. Bank must protect securities and claims diligently.

10. Bombay High Court - Central Bank of India vs Tarseema Compress Wood (1997) - Release of One Co-Surety
Facts: Bank released one of two sureties.
Ruling: Release of one co-surety does NOT discharge other co-surety (Sec 138). Each co-surety liable for full amount unless contract says otherwise. But release of principal debtor discharges all sureties.

11. Delhi High Court - Industrial Investment Bank of India vs Biswanath Jhunjhunwala (2009) - Consent Must Be Prior
Facts: Bank argued guarantor gave general consent for future variations in guarantee deed.
Ruling: SC affirmed: General consent for future variance is not valid consent under Sec 133. Consent must be specific and for that variance. Blanket clause "Bank can vary terms without consent" is void under Sec 23 Contract Act.

12. Supreme Court - Anil Sharma vs Central Bank of India (2023) - SARFAESI + Sec 139
Facts: Bank released mortgaged property without guarantor consent, then sued guarantor.
Ruling: SC: If Bank releases security under SARFAESI without guarantor consent, guarantor discharged to extent of security value under Sec 141. Bank must value security before release.

4. Practical Defences for Guarantor - Checklist

If you are Guarantor, check if Bank did any of these without your written specific consent:

1. Increased loan amount / interest / tenure - Discharged under Sec 133
2. Did OTS / Restructuring / COVID moratorium extension via binding agreement - Discharged under Sec 135
3. Released mortgage / pledge / guarantee of another person - Discharged under Sec 139/141
4. Lost security due to negligence (did not renew charge, did not file SARFAESI) - Discharged under Sec 139
5. Did not file claim in IBC against borrower - Discharged under Sec 139
6. Compromised with borrower - Discharged under Sec 134

How to Claim Discharge:

• Reply to Bank's demand notice invoking Sec 133/135/139 with case laws
• In DRT case, file Written Statement claiming discharge
• File application under Sec 17 SARFAESI if Bank tries to enforce guarantee

For Banks - How to Avoid Discharge:

1. Take specific consent letter from guarantor for every variation, OTS, restructuring - Don't rely on general clause
2. Do not release security without guarantor NOC
3. File claim in IBC for borrower to protect surety's remedy
4. Include clause: "Guarantor agrees not to claim discharge under Sec 133-139" - Note: Such clause is void as per Delhi HC - Cannot contract out of statutory discharge. Must take specific consent each time.