Full Judgment Text
2026 INSC 205
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.3200 OF 2016
BHAGYALAXMI CO-OPERATIVE
BANK LTD. …APPELLANT
VERSUS
BABALDAS AMTHARAM PATEL (D)
THROUGH LEGAL REPRESENTATIVES
& OTHERS …RESPONDENTS
J U D G M E N T
NAGARATHNA, J.
Briefly stated, the facts of the case are that on 30.10.1993,
M/s Darshak Trading Company, respondent No.6 herein, obtained
a cash-credit facility for withdrawal of Rs.4,00,000/- (Rupees Four
Lakhs Only) as a loan from Bhagyalakshmi Co-Operative Bank Ltd.,
the appellant herein. Mercantile goods belonging to respondent
No.6 were hypothecated to the appellant. Respondent Nos.1 and 2
herein, stood as guarantors/sureties for the said loan obtained by
Digitally signed by
NEETU SACHDEVA
Date: 2026.02.27
17:00:49 IST
Reason:
Signature Not Verified
1
respondent No.6 and executed contracts of guarantee in favour of
the appellant. It is the case of the appellant that respondent No.6
in connivance with some officers employed by the appellant
withdrew amounts far in excess of the Rs.4,00,000/- (Rupees Four
Lakhs Only) that had been sanctioned.
1.1 Respondent No.6 defaulted in repaying the loan to the
appellant. As a consequence, the appellant filed Lavad Suit
No.181/1995 before the Board of Nominees, seeking to recover a
sum of Rs.26,95,196.75/- (Rupees Twenty Six Lakhs, Ninety-Five
Thousands, One Hundred Ninety-Six and Seventy-Five Paise Only)
along with interest from respondent No.6. The borrower,
respondent No.6 was arrayed as defendant No.1 and respondent
Nos.1 and 2 herein, as sureties, were arrayed as defendant Nos.2
and 3 in Lavad Suit No.181/1995. By judgment dated 09.07.2001,
the Board of Nominees decreed the suit and accepted the claim of
the appellant only as regards respondent No.6 who was the
principal borrower to the extent of the Rs.26,95.196.75/- (Rupees
Twenty-Six Lakhs, Ninety-Five Thousand, One Hundred Ninety-Six
and Seventy-Five Paise Only). The said amount was directed to be
recovered from respondent No.6 along with interest from
2
01.10.1994 at the rate of 21% per annum. However, the suit
against respondents Nos.1 and 2 as sureties came to be dismissed
by the Board of Nominees and the restraint order against their
properties came to be vacated.
1.2 Challenging the judgment of the Board of Nominees dated
09.07.2001, the appellant preferred an appeal before the Gujarat
State Co-Operative Tribunal in Appeal No.552/2001. By order
dated 31.01.2007, the Gujarat State Co-Operative Tribunal
allowed the appeal of the Bank and directed the recovery of
Rs.4,00,000/- (Rupees Four Lakhs Only) along with interest
against respondent Nos.1 and 2 herein as sureties. An injunction
also came to be issued by the said Tribunal against the sureties,
restraining them from alienating their immoveable properties.
1.3 The order of the Gujarat State Co-Operative Tribunal came to
be challenged by respondent Nos.1 and 2 herein in Special Civil
Application No.17125/2007 before the High Court of Gujarat at
Ahmedabad. By the impugned order dated 25.06.2008, the High
Court allowed the said writ petition. This was on the basis that the
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Gujarat State Co-Operative Tribunal erred in holding that
respondents Nos.1 and 2 would be liable for the loan as sureties,
when it was the appellant that had permitted respondent No.6 to
withdraw amounts in excess of the loan initially sanctioned. That
under Section 139 of the Indian Contract Act, 1872, (for short, “the
Act”), a surety would stand discharged if there was lapse on the
part of the creditor and hence, the sureties could either only be
held liable as to the entire loan amount or not at all. That there
could be no bifurcation in terms of liability of the sureties as
regards the loan amount that was initially sanctioned and the
overdrawn amounts.
1.4 Hence, the instant civil appeal by the appellant-Bank.
Submissions:
2. Learned senior counsel Sri Raghavendra S. Srivatsa
appearing for the appellant submitted that the High Court was not
right in holding that under Section 133 of the Act, the sureties are
liable for the entire amount or none at all. He drew our attention
to Section 133 of the Act, which states that any variance, made
without the surety’s consent, in the terms of the contract between
4
the principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance . In this regard, he placed
reliance on the following judgments:
a) Radha Kanta Pal vs. United Bank of India Ltd., AIR 1955
Cal 217 (“Radha Kanta Pal”);
b) Bishwanath Agarwala vs. State Bank of India, AIR 2005
Jhar 69 (“Bishwanath Agarwala”);
c) State Bank of India vs. M/s Indexport Registered, (1992)
3 SCC 159 (“M/s Indexport Registered”);
d) Syndicate Bank vs. Channaveerappa Beleri, (2006) 11
SCC 506 (“Channaveerappa Beleri”);
e) H.R. Basavaraj (Dead) by his LRs vs. Canara Bank, (2010)
12 SCC 458 (“Basavaraj”); and
f) T. Raju Setty vs. Bank of Baroda, AIR 1992 Kar 108
(“Raju Setty”).
2.1 Learned senior counsel further submitted that having regard
to the facts of the present case, the Bank being the creditor is
entitled to recover the outstanding dues from the sureties till the
time when the variation in the contract occurred. However, for the
subsequent dues pursuant to the variation of the contract, which
was without the consent of the sureties, the sureties may not be
liable. He therefore submitted that having regard to the dicta of
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this Court as well as of the Karnataka High Court in Raju Setty ,
the impugned judgment may be set-aside and the relief may be
granted to the appellant Bank.
2.2 Per contra, learned counsel appearing for the
respondents/sureties pressed into service Section 139 of the Act
which states that if the creditor does any act which is inconsistent
with the rights of the surety, or omits to do any 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 . He contended that the variation in the
contract between the creditor and the borrower was without the
knowledge of the respondent/sureties. In the circumstances, they
are not liable to pay the outstanding dues. He submitted that had
the respondents been made aware of the variation in the contract
inasmuch as additional amounts were lent over and above what
was contracted for, the sureties would have had the knowledge and
awareness of what the dues were and as to whether they were liable
for the additional dues. In absence of any such intimation or
consultation with the respondent/sureties, the appellant/creditor
cannot proceed against the sureties at all as they have been
6
discharged of all their liabilities under the contract. Learned
counsel for the respondents therefore submitted that there is no
merit in this appeal and the same may be dismissed.
3. Having heard learned senior counsel and learned counsel for
the respective parties, the point that arises for our consideration is,
whether, respondents are entitled to the benefit under Section 139
of the Act or they are liable as sureties in terms of Section 133 of
the Act? In our view, respondents are liable in accordance with
Section 133 of the Act.
4. We shall discuss the relevant provisions of the Act and would
apply the same to the facts of the present case.
4.1 Chapter VIII of the Act deals with indemnity and guarantee.
Section 126 of the Act defines a contract of guarantee, surety,
principal-debtor and creditor. A contract of guarantee is a contract
to perform the promise, or to discharge the liability of a third
person, in the case of default. The person who gives the guarantee
is called the surety or the guarantor; the person in respect of whose
default, the guarantee is given, is called the principal-debtor; and
the person to whom the guarantee is given, is called the creditor. A
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guarantee may be either oral or in writing. Section 127 of the Act
deals with consideration for guarantee while Section 128 of the Act
deals with surety’s liability. The liability of the surety is co-
extensive with that of the principal-debtor, unless the contract of
guarantee provides otherwise, is what Section 128 of the Act states.
Discharge of surety is dealt with under Sections 133 to 139 of the
Act.
4.2 Sections 133 and 139 of the Act read as under:
“ 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.
xxx
“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 rights of the
surety, or omits to do any 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.”
4.3 In this case, we are concerned with discharge of surety. While
learned senior counsel for the appellant has placed reliance on
Section 133 of the Act, learned counsel for the respondents has
pressed into service Section 139 of the Act. As already noted,
8
Sections 133 to 139 of the Act provide for circumstances in which
a surety is discharged.
4.4 As per Section 133 of the Act, 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 . This Section deals with
situations of actions prior to a suit and cannot include a post
decretal situation where the judgment debtor is granted time for
making payment in instalments. Discharge of surety by variance
in terms of the contract means that the surety cannot be bound to
something for which he has not contracted. This would imply that
if the surety had not assented to certain new terms, he cannot be
bound for the final obligation of the principal-debtor which would
be different from the obligations which the surety initially
guaranteed. This is owing to variation in terms of the original
contract. In such a situation, a surety is discharged forthwith on
the contract made being altered without his consent. This is
because the liability of the surety extends only to what contract he
guaranteed and not something for which he had not contracted for.
9
Therefore, in order to bind the surety to a contract of guarantee, he
must be consulted.
4.5 In Bonar vs. Macdonald, (1850) 3 HLC 226, it was observed
that 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 notwithstanding such variance, the original agreement may
be substantially performed, will discharge the surety.
4.6 Thus, the cardinal rule is that the guarantor must not be
liable beyond the terms of his engagement vide State of
Maharashtra vs. Dr. MN Kaul (D) by his LRs, AIR 1967 SC 1634.
However, any alteration made in an instrument, after its execution,
in some particular which is not material, does not discharge the
surety from liability. But where the alteration is material, the
surety can claim to be discharged. In other words, if a change in
the contract between the guarantor and the principal-debtor
materially affects the position of the surety, then it would absolve
the surety from liability. However, the guarantor is not discharged
10
by any variation of the principal contract made with his consent.
The consent has to be proved by the person who seeks to enforce
the guarantee. A stipulation in a contract of guarantee whereby the
surety purports to waive all his rights, legal, equitable, statutory or
otherwise, which may be inconsistent with the guarantee, will not
deprive him of his right to discharge under Section 133 of the Act.
4.7 In Basavaraj, it was observed that the surety can waive all
rights available to him under Chapter VIII of the Act because these
are advantages for his benefit. The surety continues to be liable for
transactions effected before such variation. The surety is
discharged as to the transactions subsequent to the variance. In
this judgment, it was observed that anyone has a right to waive the
advantages offered by law provided they have been made for the
sole benefit of an individual in his private capacity and do not
infringe upon the public rights or public policies. As a general rule,
any person can enter into a binding contract to waive the benefits
conferred upon him by an Act of Parliament, or, as it is said, can
contract himself out of the Act, unless it can be shown that such
an agreement is in the circumstances of the particular case
contrary to public policy. This is called contracting out. Thus, in
11
the case of continuing guarantee, it was not open to a party to
revoke a guarantee when he had agreed to it being a continuing
one and thus would be bound by the terms and conditions of the
agreement executed at the time of entering into the guarantee, the
legal representatives of the deceased are also liable to repay the
loan.
4.8 Section 139 of the Act, on the other hand, states that if the
creditor does any act which is inconsistent with the rights of the
surety or omits to do any 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.
4.9 The essence of the said Section is the curtailment of the
surety’s remedy or enhancement in his liability. Surety has the
right to discharge all his liability when debt itself is subsisting and
the remedy of the surety against the principal-debtor is unimpaired.
It is said that Section 139 of the Act is in the nature of a residuary
Section, the object of which is to ensure that no arrangement
different from that contained in the surety’s contract is forced upon
him and the surety, if he pays the debt, has the benefit of every
12
remedy which the creditor had against the principal-debtor. Thus,
the surety is discharged if the creditor:
(i) does an act inconsistent with the rights of the surety; or
(ii) omits to do any act which his duty to the surety requires him
to do, and as a result the surety’s eventual remedy against
the principal-debtor is thereby impaired.
4.10 Circumstances where acts are inconsistent with the rights
of the surety could be referred to at this stage. The surety was held
discharged -
(i) where the creditor, without the surety’s consent, granted
time to the debtor and allowed instalments vide Pirthi Singh
vs. Ram Charan Aggarwal, AIR 1944 Lah 428.
(ii) where the court obtaining a security bond by hypothecation
of immovable property for securing the proper disposal of
money due to minors, acted inconsistently with the rights of
sureties vide Bhagwan Das vs. M Ghulam Mahommad,
AIR 1935 Lah 863.
(iii) where the creditor consented to the release of attachment
over the properties Ram Prasad vs. Gordhan, AIR
vide
1934 All 616.
13
(iv) where the creditor bank which had advanced loan for the
purchase of a vehicle failed to register the charge with the
Regional Transport Office vide Jose Inacio Lourence vs.
Syndicate Bank, (1989) 65 Com Cas 698.
(v) where the creditor in a contract for sale or a tea garden failed
to execute the conveyance of the property to purchaser,
payment of price by whom had been guaranteed by the
surety vide Probodh Kumar Das vs. Gillanders Arbuthnot
& Co., AIR 1934 Cal 699.
(vi) Where the creditor prepays any instalment of payment before
the debtor had rendered that performance upon which the
payment fell due vide Calvert vs. London Dock Co., (1838)
2 Keen 638.
[Source: Pollock and Mulla on the Indian Contract &
th
Specific Relief Acts, 16 Edition]
5. In the case of Radha Kanta Pal , the predecessor of the
plaintiff before the High Court had signed a bond with one Comilla
Banking Corporation Limited that had since amalgamated with
and was represented by the defendant-Bank. By virtue of this bond,
in consideration of the appointment of his relation to the post of
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cashier and in consideration for the due discharge of his duties,
the predecessor of the plaintiff stood as a guarantor to the extent
of Rs.10,000/- for himself, his heirs, executors and assigns. The
service of the relation came to be terminated but the deposit money
was alleged to not have been returned to the plaintiff. In response,
the defendant-Bank claimed that the relation of the predecessor of
the plaintiff was the cause of shortage of the Bank’s cash
amounting to Rs.8,800/- and the Bank is therefore entitled to
deduct money out of the security deposit. The plaintiff claimed that
neither he nor his predecessor had any knowledge of the
defalcation or breach of duty committed by the relation and the
Bank gave no notice to them regarding the same. The High Court
of Calcutta observed that in order to attract Section 139 of the Act,
it is not only that an act or omission that is inconsistent with the
rights of the surety is done by the creditor but also that the
eventual remedy of the surety against the principal debtor is
impaired. As there was no such impairment of the eventual remedy
of the surety against the principal debtor, the plaintiff’s case was
said to have failed.
15
5.1 In the case of Bishwanath Agarwala , the facts were that one
Joydeb Panja, the principal debtor had approached the
respondent-State Bank of India for a cash credit facility for the
purposes of running his business up to the sum of Rs 2,50,000/-
(Rupees Two Lakhs and Fifty-Thousand Only) for which the
petitioner therein stood as a guarantor to pay the dues in case of
default of the principal debtor. The principal debtor is alleged to
have availed of the cash credit facility but failed to carry out the
terms and conditions, including routing the cash credit account
and also committed certain irregularities. Similar to the case at
hand, at the request of the principal debtor, the Bank allowed
overdrawing of amounts from the cash credit account. Later, upon
failure of the principal debtor to repay the loan amounts, the Bank
sought to recover the entire amount, including the overdrawn
amounts from both the principal debtor as well as the surety,
holding them both to be jointly and severally liable. The High Court
of Jharkhand observed that the creditor could not be constrained
to first attempt to exhaust its remedy against the principal debtor,
as the liability of the principal debtor and guarantor was joint and
16
several. However, while the guarantor would still be liable to the
extent of the earlier-borrowed Rs.2,50,000/-, he would not be
bound by the overdrawn amounts permitted by the Bank and
availed of by the principal debtor, i.e. that the surety would only be
discharged in respect of transactions subsequent to the variance
of the contract.
5.2 In the case of M/s Indexport Registered, a three-Judge
Bench of this Court upheld the salient principle that the liability of
the surety is co-extensive with that of the principal debtor and that
the creditor was not required to exhaust his remedies as against
the principal debtor necessarily before proceeding against the
sureties to recover the loan amount, and the guarantor can even
be proceeded against first.
5.3 In the case of Channaveerappa Beleri, a two-Judge Bench
of this Court observed that the liability of the guarantor and the
question as to when it would arise would depend entirely on the
terms of his contract, and the guarantee itself could be in the
nature of a continuing guarantee, an ordinary guarantee, may
stipulate that the guarantor is liable to pay only on demand by the
17
creditor and may limit the liability of the guarantor to a particular
sum. It further observed that even a time-barred claim against the
principal debtor may still be enforceable as against the guarantor.
5.4 In the case of Basavaraj, in a similar factual matrix, the
appellants in the said case had stood as a guarantor to a loan
availed of by a trust to the extent of Rs.15,00,000/- (Rupees Fifteen
Lakhs Only) along with interest at the rate of 15% per annum from
the respondent-Bank. Further, additional amounts came to be
borrowed on the basis of agreements that were subsequently
executed between the trust and respondent-Bank. The respondent-
Bank filed a suit against the appellants seeking recovery of the loan
amount. The appellant sought discharge from the guarantee on the
basis that granting further loans amounted to varying the terms of
the contract, thus resulting in the novation of the agreement. A
two-Judge Bench of this Court affirmed a decision of the Karnataka
High Court in Raju Setty , wherein the High Court had held that
the surety can waive the rights available to him under Chapter VIII
of the Act. On an analysis of the facts in the said case and on a
perusal of the agreement, it was revealed that the guarantee was
to continue to all future transactions except when the guarantor
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disclaimed from his liability explicitly through a written statement.
Further, that the contract between the principal debtor and
guarantor was in the nature of a guarantee but that between the
guarantor and the respondent-Bank was in the nature of a creditor
and principal debtor and the liability of the guarantor was co-
extensive with that of the principal debtor.
6. According to Chitty on Contracts, 28th Edition, Volume 2, at
1348, paras 44-097, “ short of bad faith, misrepresentation or
concealment amounting to misrepresentation, connivance with the
default of the principal-debtor, or variation of the terms of the
contract to the possible prejudice of the surety the creditor can act
.
as he chooses”
6.1 Thus, 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
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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.
7. In the instant case, the undisputed facts are that respondent
No. 6 obtained a cash-credit facility for withdrawal of
Rs.4,00,000/- (Rupees Four Lakh Only). It is to the extent of this
amount alone that respondent Nos.1 and 2 herein stood as sureties.
Whether by virtue of allegedly conniving with employees of the
Bank or otherwise, it is admittedly true that amounts far in excess
of the Rs.4,00,000/- (Rupees Four Lakh Only) (that was initially
sanctioned) were withdrawn by respondent No.6 from the
appellant-Bank. This functions as a fundamental variation of the
terms of the initial contract of guarantee, wherein the extent of the
liability to which respondent Nos.1 and 2 consented to be liable for
has been exceeded. Under Section 133 of the Act, any modification
of the contract between the creditor and the principal debtor, that
20
has been made without the consent of the sureties, cannot
subsequently bind them. Critically, however, a plain reading of the
said provision reveals that such discharge of the surety is not
absolute in nature. The surety is discharged only in respect of
transactions that occurred subsequent to the variance of the terms
of the contract. Thus, the observation of the High Court in the
impugned order that the sureties must either be liable for the entire
loan amount or not at all is erroneous, as the discharge of the
sureties in the instant case can only be in respect of the amounts
in excess of the Rs.4,00,000/- (Rupees Four Lakhs Only) that were
withdrawn as under Section 133 of the Act, as it is only these
amounts that would constitute a variance of the contract. The said
bifurcation that was deemed to be impermissible by the High Court
is, in fact, mandated by the statute in order to determine the extent
of the sureties’ liability as per Section 133 of the Act.
7.1 The contention of learned counsel for the respondents that
the discharge of the sureties in the instant case would be covered
by Section 139 cannot be accepted. The discharge of a surety under
Section 139 is under an altogether different set of circumstances,
as elucidated in the aforementioned discussion. For Section 139 to
21
apply, the creditor must (1) either act in a manner that is
inconsistent with the surety’s rights or omit to act in a manner that
the creditor is duty bound to and (2) such act or omission must
impair the eventual remedy of the surety as against the principal
debtor. In the instant case, while the rights of the surety could be
said to have been affected by the appellant-Bank’s allowance of the
principal debtor to overdraw amounts from the cash credit facility
in excess of the Rs.4,00,000/- (Rupees Four Lakhs Only) that had
initially been sanctioned, there is no impairment of the eventual
remedy of the respondent Nos.1 and 2 - sureties against the
respondent No.6 – principal debtor. It is also a well-established
principle that no bar can be placed on the creditor so as to restrict
their ability to recover the amounts owed from the sureties before
proceeding as against the principal debtor.
7.2 In this backdrop, we find no hesitation in holding that the
applicable provision to the instant factual matrix is that of Section
133 of the Act. By virtue of the application of the said provision,
respondent Nos.1 and 2 -sureties are liable to the extent of
Rs.4,00,000/- (Rupees Four Lakhs Only) with applicable interest
that was initially sanctioned to respondent No.6 – principal
22
debtor and for which respondent Nos.1 and 2 consented to stand
as sureties. However, they are not liable for the excess amounts
permitted to be withdrawn from the cash-credit facility of the
appellant-Bank by respondent No.6- principal debtor.
7.3 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 in the instant case,
which is of the original amount of Rs.4,00,000/- (Rupees Four
Lakhs only) with applicable interest.
7.4 In the result, the appeal is allowed and the impugned order
of the High Court of Gujarat dated 25.06.2008 in Special Civil
Application No.17125 of 2007 is set aside.
23
Parties to bear their respective costs.
……………………………..J.
(B.V. NAGARATHNA)
……………………………..J.
(UJJAL BHUYAN)
NEW DELHI;
FEBRUARY 27, 2026.
24
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.3200 OF 2016
BHAGYALAXMI CO-OPERATIVE
BANK LTD. …APPELLANT
VERSUS
BABALDAS AMTHARAM PATEL (D)
THROUGH LEGAL REPRESENTATIVES
& OTHERS …RESPONDENTS
J U D G M E N T
NAGARATHNA, J.
Briefly stated, the facts of the case are that on 30.10.1993,
M/s Darshak Trading Company, respondent No.6 herein, obtained
a cash-credit facility for withdrawal of Rs.4,00,000/- (Rupees Four
Lakhs Only) as a loan from Bhagyalakshmi Co-Operative Bank Ltd.,
the appellant herein. Mercantile goods belonging to respondent
No.6 were hypothecated to the appellant. Respondent Nos.1 and 2
herein, stood as guarantors/sureties for the said loan obtained by
Digitally signed by
NEETU SACHDEVA
Date: 2026.02.27
17:00:49 IST
Reason:
Signature Not Verified
1
respondent No.6 and executed contracts of guarantee in favour of
the appellant. It is the case of the appellant that respondent No.6
in connivance with some officers employed by the appellant
withdrew amounts far in excess of the Rs.4,00,000/- (Rupees Four
Lakhs Only) that had been sanctioned.
1.1 Respondent No.6 defaulted in repaying the loan to the
appellant. As a consequence, the appellant filed Lavad Suit
No.181/1995 before the Board of Nominees, seeking to recover a
sum of Rs.26,95,196.75/- (Rupees Twenty Six Lakhs, Ninety-Five
Thousands, One Hundred Ninety-Six and Seventy-Five Paise Only)
along with interest from respondent No.6. The borrower,
respondent No.6 was arrayed as defendant No.1 and respondent
Nos.1 and 2 herein, as sureties, were arrayed as defendant Nos.2
and 3 in Lavad Suit No.181/1995. By judgment dated 09.07.2001,
the Board of Nominees decreed the suit and accepted the claim of
the appellant only as regards respondent No.6 who was the
principal borrower to the extent of the Rs.26,95.196.75/- (Rupees
Twenty-Six Lakhs, Ninety-Five Thousand, One Hundred Ninety-Six
and Seventy-Five Paise Only). The said amount was directed to be
recovered from respondent No.6 along with interest from
2
01.10.1994 at the rate of 21% per annum. However, the suit
against respondents Nos.1 and 2 as sureties came to be dismissed
by the Board of Nominees and the restraint order against their
properties came to be vacated.
1.2 Challenging the judgment of the Board of Nominees dated
09.07.2001, the appellant preferred an appeal before the Gujarat
State Co-Operative Tribunal in Appeal No.552/2001. By order
dated 31.01.2007, the Gujarat State Co-Operative Tribunal
allowed the appeal of the Bank and directed the recovery of
Rs.4,00,000/- (Rupees Four Lakhs Only) along with interest
against respondent Nos.1 and 2 herein as sureties. An injunction
also came to be issued by the said Tribunal against the sureties,
restraining them from alienating their immoveable properties.
1.3 The order of the Gujarat State Co-Operative Tribunal came to
be challenged by respondent Nos.1 and 2 herein in Special Civil
Application No.17125/2007 before the High Court of Gujarat at
Ahmedabad. By the impugned order dated 25.06.2008, the High
Court allowed the said writ petition. This was on the basis that the
3
Gujarat State Co-Operative Tribunal erred in holding that
respondents Nos.1 and 2 would be liable for the loan as sureties,
when it was the appellant that had permitted respondent No.6 to
withdraw amounts in excess of the loan initially sanctioned. That
under Section 139 of the Indian Contract Act, 1872, (for short, “the
Act”), a surety would stand discharged if there was lapse on the
part of the creditor and hence, the sureties could either only be
held liable as to the entire loan amount or not at all. That there
could be no bifurcation in terms of liability of the sureties as
regards the loan amount that was initially sanctioned and the
overdrawn amounts.
1.4 Hence, the instant civil appeal by the appellant-Bank.
Submissions:
2. Learned senior counsel Sri Raghavendra S. Srivatsa
appearing for the appellant submitted that the High Court was not
right in holding that under Section 133 of the Act, the sureties are
liable for the entire amount or none at all. He drew our attention
to Section 133 of the Act, which states that any variance, made
without the surety’s consent, in the terms of the contract between
4
the principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance . In this regard, he placed
reliance on the following judgments:
a) Radha Kanta Pal vs. United Bank of India Ltd., AIR 1955
Cal 217 (“Radha Kanta Pal”);
b) Bishwanath Agarwala vs. State Bank of India, AIR 2005
Jhar 69 (“Bishwanath Agarwala”);
c) State Bank of India vs. M/s Indexport Registered, (1992)
3 SCC 159 (“M/s Indexport Registered”);
d) Syndicate Bank vs. Channaveerappa Beleri, (2006) 11
SCC 506 (“Channaveerappa Beleri”);
e) H.R. Basavaraj (Dead) by his LRs vs. Canara Bank, (2010)
12 SCC 458 (“Basavaraj”); and
f) T. Raju Setty vs. Bank of Baroda, AIR 1992 Kar 108
(“Raju Setty”).
2.1 Learned senior counsel further submitted that having regard
to the facts of the present case, the Bank being the creditor is
entitled to recover the outstanding dues from the sureties till the
time when the variation in the contract occurred. However, for the
subsequent dues pursuant to the variation of the contract, which
was without the consent of the sureties, the sureties may not be
liable. He therefore submitted that having regard to the dicta of
5
this Court as well as of the Karnataka High Court in Raju Setty ,
the impugned judgment may be set-aside and the relief may be
granted to the appellant Bank.
2.2 Per contra, learned counsel appearing for the
respondents/sureties pressed into service Section 139 of the Act
which states that if the creditor does any act which is inconsistent
with the rights of the surety, or omits to do any 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 . He contended that the variation in the
contract between the creditor and the borrower was without the
knowledge of the respondent/sureties. In the circumstances, they
are not liable to pay the outstanding dues. He submitted that had
the respondents been made aware of the variation in the contract
inasmuch as additional amounts were lent over and above what
was contracted for, the sureties would have had the knowledge and
awareness of what the dues were and as to whether they were liable
for the additional dues. In absence of any such intimation or
consultation with the respondent/sureties, the appellant/creditor
cannot proceed against the sureties at all as they have been
6
discharged of all their liabilities under the contract. Learned
counsel for the respondents therefore submitted that there is no
merit in this appeal and the same may be dismissed.
3. Having heard learned senior counsel and learned counsel for
the respective parties, the point that arises for our consideration is,
whether, respondents are entitled to the benefit under Section 139
of the Act or they are liable as sureties in terms of Section 133 of
the Act? In our view, respondents are liable in accordance with
Section 133 of the Act.
4. We shall discuss the relevant provisions of the Act and would
apply the same to the facts of the present case.
4.1 Chapter VIII of the Act deals with indemnity and guarantee.
Section 126 of the Act defines a contract of guarantee, surety,
principal-debtor and creditor. A contract of guarantee is a contract
to perform the promise, or to discharge the liability of a third
person, in the case of default. The person who gives the guarantee
is called the surety or the guarantor; the person in respect of whose
default, the guarantee is given, is called the principal-debtor; and
the person to whom the guarantee is given, is called the creditor. A
7
guarantee may be either oral or in writing. Section 127 of the Act
deals with consideration for guarantee while Section 128 of the Act
deals with surety’s liability. The liability of the surety is co-
extensive with that of the principal-debtor, unless the contract of
guarantee provides otherwise, is what Section 128 of the Act states.
Discharge of surety is dealt with under Sections 133 to 139 of the
Act.
4.2 Sections 133 and 139 of the Act read as under:
“ 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.
xxx
“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 rights of the
surety, or omits to do any 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.”
4.3 In this case, we are concerned with discharge of surety. While
learned senior counsel for the appellant has placed reliance on
Section 133 of the Act, learned counsel for the respondents has
pressed into service Section 139 of the Act. As already noted,
8
Sections 133 to 139 of the Act provide for circumstances in which
a surety is discharged.
4.4 As per Section 133 of the Act, 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 . This Section deals with
situations of actions prior to a suit and cannot include a post
decretal situation where the judgment debtor is granted time for
making payment in instalments. Discharge of surety by variance
in terms of the contract means that the surety cannot be bound to
something for which he has not contracted. This would imply that
if the surety had not assented to certain new terms, he cannot be
bound for the final obligation of the principal-debtor which would
be different from the obligations which the surety initially
guaranteed. This is owing to variation in terms of the original
contract. In such a situation, a surety is discharged forthwith on
the contract made being altered without his consent. This is
because the liability of the surety extends only to what contract he
guaranteed and not something for which he had not contracted for.
9
Therefore, in order to bind the surety to a contract of guarantee, he
must be consulted.
4.5 In Bonar vs. Macdonald, (1850) 3 HLC 226, it was observed
that 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 notwithstanding such variance, the original agreement may
be substantially performed, will discharge the surety.
4.6 Thus, the cardinal rule is that the guarantor must not be
liable beyond the terms of his engagement vide State of
Maharashtra vs. Dr. MN Kaul (D) by his LRs, AIR 1967 SC 1634.
However, any alteration made in an instrument, after its execution,
in some particular which is not material, does not discharge the
surety from liability. But where the alteration is material, the
surety can claim to be discharged. In other words, if a change in
the contract between the guarantor and the principal-debtor
materially affects the position of the surety, then it would absolve
the surety from liability. However, the guarantor is not discharged
10
by any variation of the principal contract made with his consent.
The consent has to be proved by the person who seeks to enforce
the guarantee. A stipulation in a contract of guarantee whereby the
surety purports to waive all his rights, legal, equitable, statutory or
otherwise, which may be inconsistent with the guarantee, will not
deprive him of his right to discharge under Section 133 of the Act.
4.7 In Basavaraj, it was observed that the surety can waive all
rights available to him under Chapter VIII of the Act because these
are advantages for his benefit. The surety continues to be liable for
transactions effected before such variation. The surety is
discharged as to the transactions subsequent to the variance. In
this judgment, it was observed that anyone has a right to waive the
advantages offered by law provided they have been made for the
sole benefit of an individual in his private capacity and do not
infringe upon the public rights or public policies. As a general rule,
any person can enter into a binding contract to waive the benefits
conferred upon him by an Act of Parliament, or, as it is said, can
contract himself out of the Act, unless it can be shown that such
an agreement is in the circumstances of the particular case
contrary to public policy. This is called contracting out. Thus, in
11
the case of continuing guarantee, it was not open to a party to
revoke a guarantee when he had agreed to it being a continuing
one and thus would be bound by the terms and conditions of the
agreement executed at the time of entering into the guarantee, the
legal representatives of the deceased are also liable to repay the
loan.
4.8 Section 139 of the Act, on the other hand, states that if the
creditor does any act which is inconsistent with the rights of the
surety or omits to do any 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.
4.9 The essence of the said Section is the curtailment of the
surety’s remedy or enhancement in his liability. Surety has the
right to discharge all his liability when debt itself is subsisting and
the remedy of the surety against the principal-debtor is unimpaired.
It is said that Section 139 of the Act is in the nature of a residuary
Section, the object of which is to ensure that no arrangement
different from that contained in the surety’s contract is forced upon
him and the surety, if he pays the debt, has the benefit of every
12
remedy which the creditor had against the principal-debtor. Thus,
the surety is discharged if the creditor:
(i) does an act inconsistent with the rights of the surety; or
(ii) omits to do any act which his duty to the surety requires him
to do, and as a result the surety’s eventual remedy against
the principal-debtor is thereby impaired.
4.10 Circumstances where acts are inconsistent with the rights
of the surety could be referred to at this stage. The surety was held
discharged -
(i) where the creditor, without the surety’s consent, granted
time to the debtor and allowed instalments vide Pirthi Singh
vs. Ram Charan Aggarwal, AIR 1944 Lah 428.
(ii) where the court obtaining a security bond by hypothecation
of immovable property for securing the proper disposal of
money due to minors, acted inconsistently with the rights of
sureties vide Bhagwan Das vs. M Ghulam Mahommad,
AIR 1935 Lah 863.
(iii) where the creditor consented to the release of attachment
over the properties Ram Prasad vs. Gordhan, AIR
vide
1934 All 616.
13
(iv) where the creditor bank which had advanced loan for the
purchase of a vehicle failed to register the charge with the
Regional Transport Office vide Jose Inacio Lourence vs.
Syndicate Bank, (1989) 65 Com Cas 698.
(v) where the creditor in a contract for sale or a tea garden failed
to execute the conveyance of the property to purchaser,
payment of price by whom had been guaranteed by the
surety vide Probodh Kumar Das vs. Gillanders Arbuthnot
& Co., AIR 1934 Cal 699.
(vi) Where the creditor prepays any instalment of payment before
the debtor had rendered that performance upon which the
payment fell due vide Calvert vs. London Dock Co., (1838)
2 Keen 638.
[Source: Pollock and Mulla on the Indian Contract &
th
Specific Relief Acts, 16 Edition]
5. In the case of Radha Kanta Pal , the predecessor of the
plaintiff before the High Court had signed a bond with one Comilla
Banking Corporation Limited that had since amalgamated with
and was represented by the defendant-Bank. By virtue of this bond,
in consideration of the appointment of his relation to the post of
14
cashier and in consideration for the due discharge of his duties,
the predecessor of the plaintiff stood as a guarantor to the extent
of Rs.10,000/- for himself, his heirs, executors and assigns. The
service of the relation came to be terminated but the deposit money
was alleged to not have been returned to the plaintiff. In response,
the defendant-Bank claimed that the relation of the predecessor of
the plaintiff was the cause of shortage of the Bank’s cash
amounting to Rs.8,800/- and the Bank is therefore entitled to
deduct money out of the security deposit. The plaintiff claimed that
neither he nor his predecessor had any knowledge of the
defalcation or breach of duty committed by the relation and the
Bank gave no notice to them regarding the same. The High Court
of Calcutta observed that in order to attract Section 139 of the Act,
it is not only that an act or omission that is inconsistent with the
rights of the surety is done by the creditor but also that the
eventual remedy of the surety against the principal debtor is
impaired. As there was no such impairment of the eventual remedy
of the surety against the principal debtor, the plaintiff’s case was
said to have failed.
15
5.1 In the case of Bishwanath Agarwala , the facts were that one
Joydeb Panja, the principal debtor had approached the
respondent-State Bank of India for a cash credit facility for the
purposes of running his business up to the sum of Rs 2,50,000/-
(Rupees Two Lakhs and Fifty-Thousand Only) for which the
petitioner therein stood as a guarantor to pay the dues in case of
default of the principal debtor. The principal debtor is alleged to
have availed of the cash credit facility but failed to carry out the
terms and conditions, including routing the cash credit account
and also committed certain irregularities. Similar to the case at
hand, at the request of the principal debtor, the Bank allowed
overdrawing of amounts from the cash credit account. Later, upon
failure of the principal debtor to repay the loan amounts, the Bank
sought to recover the entire amount, including the overdrawn
amounts from both the principal debtor as well as the surety,
holding them both to be jointly and severally liable. The High Court
of Jharkhand observed that the creditor could not be constrained
to first attempt to exhaust its remedy against the principal debtor,
as the liability of the principal debtor and guarantor was joint and
16
several. However, while the guarantor would still be liable to the
extent of the earlier-borrowed Rs.2,50,000/-, he would not be
bound by the overdrawn amounts permitted by the Bank and
availed of by the principal debtor, i.e. that the surety would only be
discharged in respect of transactions subsequent to the variance
of the contract.
5.2 In the case of M/s Indexport Registered, a three-Judge
Bench of this Court upheld the salient principle that the liability of
the surety is co-extensive with that of the principal debtor and that
the creditor was not required to exhaust his remedies as against
the principal debtor necessarily before proceeding against the
sureties to recover the loan amount, and the guarantor can even
be proceeded against first.
5.3 In the case of Channaveerappa Beleri, a two-Judge Bench
of this Court observed that the liability of the guarantor and the
question as to when it would arise would depend entirely on the
terms of his contract, and the guarantee itself could be in the
nature of a continuing guarantee, an ordinary guarantee, may
stipulate that the guarantor is liable to pay only on demand by the
17
creditor and may limit the liability of the guarantor to a particular
sum. It further observed that even a time-barred claim against the
principal debtor may still be enforceable as against the guarantor.
5.4 In the case of Basavaraj, in a similar factual matrix, the
appellants in the said case had stood as a guarantor to a loan
availed of by a trust to the extent of Rs.15,00,000/- (Rupees Fifteen
Lakhs Only) along with interest at the rate of 15% per annum from
the respondent-Bank. Further, additional amounts came to be
borrowed on the basis of agreements that were subsequently
executed between the trust and respondent-Bank. The respondent-
Bank filed a suit against the appellants seeking recovery of the loan
amount. The appellant sought discharge from the guarantee on the
basis that granting further loans amounted to varying the terms of
the contract, thus resulting in the novation of the agreement. A
two-Judge Bench of this Court affirmed a decision of the Karnataka
High Court in Raju Setty , wherein the High Court had held that
the surety can waive the rights available to him under Chapter VIII
of the Act. On an analysis of the facts in the said case and on a
perusal of the agreement, it was revealed that the guarantee was
to continue to all future transactions except when the guarantor
18
disclaimed from his liability explicitly through a written statement.
Further, that the contract between the principal debtor and
guarantor was in the nature of a guarantee but that between the
guarantor and the respondent-Bank was in the nature of a creditor
and principal debtor and the liability of the guarantor was co-
extensive with that of the principal debtor.
6. According to Chitty on Contracts, 28th Edition, Volume 2, at
1348, paras 44-097, “ short of bad faith, misrepresentation or
concealment amounting to misrepresentation, connivance with the
default of the principal-debtor, or variation of the terms of the
contract to the possible prejudice of the surety the creditor can act
.
as he chooses”
6.1 Thus, 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
19
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.
7. In the instant case, the undisputed facts are that respondent
No. 6 obtained a cash-credit facility for withdrawal of
Rs.4,00,000/- (Rupees Four Lakh Only). It is to the extent of this
amount alone that respondent Nos.1 and 2 herein stood as sureties.
Whether by virtue of allegedly conniving with employees of the
Bank or otherwise, it is admittedly true that amounts far in excess
of the Rs.4,00,000/- (Rupees Four Lakh Only) (that was initially
sanctioned) were withdrawn by respondent No.6 from the
appellant-Bank. This functions as a fundamental variation of the
terms of the initial contract of guarantee, wherein the extent of the
liability to which respondent Nos.1 and 2 consented to be liable for
has been exceeded. Under Section 133 of the Act, any modification
of the contract between the creditor and the principal debtor, that
20
has been made without the consent of the sureties, cannot
subsequently bind them. Critically, however, a plain reading of the
said provision reveals that such discharge of the surety is not
absolute in nature. The surety is discharged only in respect of
transactions that occurred subsequent to the variance of the terms
of the contract. Thus, the observation of the High Court in the
impugned order that the sureties must either be liable for the entire
loan amount or not at all is erroneous, as the discharge of the
sureties in the instant case can only be in respect of the amounts
in excess of the Rs.4,00,000/- (Rupees Four Lakhs Only) that were
withdrawn as under Section 133 of the Act, as it is only these
amounts that would constitute a variance of the contract. The said
bifurcation that was deemed to be impermissible by the High Court
is, in fact, mandated by the statute in order to determine the extent
of the sureties’ liability as per Section 133 of the Act.
7.1 The contention of learned counsel for the respondents that
the discharge of the sureties in the instant case would be covered
by Section 139 cannot be accepted. The discharge of a surety under
Section 139 is under an altogether different set of circumstances,
as elucidated in the aforementioned discussion. For Section 139 to
21
apply, the creditor must (1) either act in a manner that is
inconsistent with the surety’s rights or omit to act in a manner that
the creditor is duty bound to and (2) such act or omission must
impair the eventual remedy of the surety as against the principal
debtor. In the instant case, while the rights of the surety could be
said to have been affected by the appellant-Bank’s allowance of the
principal debtor to overdraw amounts from the cash credit facility
in excess of the Rs.4,00,000/- (Rupees Four Lakhs Only) that had
initially been sanctioned, there is no impairment of the eventual
remedy of the respondent Nos.1 and 2 - sureties against the
respondent No.6 – principal debtor. It is also a well-established
principle that no bar can be placed on the creditor so as to restrict
their ability to recover the amounts owed from the sureties before
proceeding as against the principal debtor.
7.2 In this backdrop, we find no hesitation in holding that the
applicable provision to the instant factual matrix is that of Section
133 of the Act. By virtue of the application of the said provision,
respondent Nos.1 and 2 -sureties are liable to the extent of
Rs.4,00,000/- (Rupees Four Lakhs Only) with applicable interest
that was initially sanctioned to respondent No.6 – principal
22
debtor and for which respondent Nos.1 and 2 consented to stand
as sureties. However, they are not liable for the excess amounts
permitted to be withdrawn from the cash-credit facility of the
appellant-Bank by respondent No.6- principal debtor.
7.3 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 in the instant case,
which is of the original amount of Rs.4,00,000/- (Rupees Four
Lakhs only) with applicable interest.
7.4 In the result, the appeal is allowed and the impugned order
of the High Court of Gujarat dated 25.06.2008 in Special Civil
Application No.17125 of 2007 is set aside.
23
Parties to bear their respective costs.
……………………………..J.
(B.V. NAGARATHNA)
……………………………..J.
(UJJAL BHUYAN)
NEW DELHI;
FEBRUARY 27, 2026.
24