2026 INSC 205

1

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

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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

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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 th e 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

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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

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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,

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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.

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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

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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

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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

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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 vide Ram Prasad vs. Gordhan, AIR

1934 All 616.

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(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 &

Specific Relief Acts, 16

th 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.

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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

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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

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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

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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

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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

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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.

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Parties to bear their respective costs.

……………………………..J.

(B.V. NAGARATHNA)

……………………………..J.

(UJJAL BHUYAN)

NEW DELHI;

FEBRUARY 27, 2026.