Overdrawing Beyond Sanctioned Limit Without Surety’s Consent Leads To Partial Discharge Under Section 133 Contract Act: Supreme Court
Guarantor liable only for originally sanctioned amount; Section 139 not attracted absent impairment of remedy
Justice B.V. Nagarathna, Justice Ujjal Bhuyan, Supreme Court
The Supreme Court has held that permitting a borrower to withdraw amounts beyond the sanctioned loan limit without the consent of the surety results in only a partial discharge of the guarantor under Section 133 of the Indian Contract Act, 1872. The Court clarified that the liability of a surety cannot be treated as an all or nothing proposition.
The Bench noted that Section 139, of the Act the applies only where the creditor’s act impairs the surety’s eventual remedy against the principal debtor. However, in the present case, although the Bank allowed excess withdrawal, there was no material to show that the sureties’ remedy against the borrower had been impaired.
Justice B.V. Nagarathna and Justice Ujjal Bhuyan while allowing the appeal filed by Bhagyalaxmi Co-Operative Bank Ltd., set aside the judgment of the of Gujarat High Court, which had held that the guarantors could either be made liable for the entire loan amount or not at all.
The Bench observed, “in order to attract Section 139 of the Act, there must not only be an act inconsistent with the rights of the surety, or the omission to do an act which it is the creditor’s or employer’s duty to do, but it is essential that thereby the eventual remedy of the surety is impaired. Thus, a surety will be discharged by acts or omissions of the creditor which, though not having the legal consequences of discharging the principal, impair the eventual remedy of the surety against him. For instance, a surety will be released if the creditor, due to what he has done, cannot, on payment by the surety, give him the securities in exactly the same condition as they formerly stood in his hands. However, where the creditor withdrew the suit against the principal-debtor, but continued the suit against the surety, the latter was not discharged because his remedy against the principal-debtor was not impaired”.
“The High Court was not right in holding that guarantors may be either liable to pay the entire amount which is deemed payable by the principal borrower or not at all and that there cannot be a bifurcation of the liability. This is contrary to Section 133 of the Act which speaks about discharge of surety by variance in terms of contract and that any variance made without the consent of the surety only can be resisted. Hence, in the instant case, since there was no intimation to the respondent-sureties about the over drawing from the cash credit facility, they are liable to the extent of their liability till the variance was made…”, the Bench further observed.
Senior Advocate Raghavendra S. Stivatsa appeared for the appellant and Kedar Nath Tripathy, AOR appeared for the respondent.
For the facts in the matter, M/s Darshak Trading Company had obtained a cash-credit facility of ₹4,00,000 from the appellant Bank, where Respondent Nos.1 and 2 stood as sureties for this loan.
It was alleged that the borrower, in connivance with certain bank officials, withdrew amounts far exceeding the sanctioned limit. Upon default, the Bank initiated recovery proceedings seeking over ₹26.95 lakh along with interest.
While the Board of Nominees decreed the claim against the principal borrower, it dismissed the suit against the guarantors. On appeal, the Gujarat State Co-Operative Tribunal held the guarantors liable to the extent of ₹4,00,000 with interest. However, the High Court interfered, holding that there could be no bifurcation of liability.
Under Section 133, any variance made without the surety’s consent in the terms of the contract between the principal debtor and creditor discharges the surety only in respect of transactions subsequent to such variance.
The Court observed that the guarantors had agreed to stand surety only to the extent of ₹4,00,000, therefore, permitting withdrawals beyond this limit constituted a fundamental variation of the contract of guarantee. However, such variation does not result in total discharge as the statute itself mandates that discharge operates only in respect of the transactions subsequent to the variance.
Accordingly, the Court restored the Tribunal’s order and held that the guarantors are liable only to the extent of ₹4,00,000, the amount originally sanctioned along with applicable interest. They are not liable for the excess amounts withdrawn beyond the sanctioned limit.
Cause Title: Bhagyalaxmi Co-Operative Bank Ltd. v. Babaldas Amtharam Patel (D) Through Legal Representatives & Others [Neutral Citation: 2026 INSC 205]
Appearances:
Appellant: Raghavendra S. Stivatsa, Sr. Adv., Komal Mundhra, AOR, Saurabh Agrawal, Aniket Bhattacharyya, Hari Vishnu Tiwari, Laxita Upadhyay, Advocates.
Respondent: Kedar Nath Tripathy, AOR, Pranaya Kumar Mohapatra, AOR.