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Bhagyalaxmi Co-Operative Bank Ltd. v. Babaldas Amtharam Patel (D) Through LRs. & Ors.

Civil Appeal · 2026 INSC 205Decided 27 Feb 2026
C.A. No.-003200-003200 - 2016
Justice B.V. Nagarathna · Justice Ujjal Bhuyan

Background

A trading company took a cash-credit loan of Rs. 4,00,000 from Bhagyalaxmi Co-Operative Bank, with two individuals standing as guarantors (sureties) for that amount. The borrower, allegedly in connivance with bank staff, withdrew far more than the sanctioned Rs. 4,00,000 and then defaulted. When the Bank sued to recover the full outstanding amount (over Rs. 26 lakh) from the borrower and the sureties, the arbitral forum (Board of Nominees) held only the borrower liable; on appeal the Co-operative Tribunal made the sureties liable for the original Rs. 4,00,000, but the Gujarat High Court set that aside entirely, holding sureties are either liable for everything or nothing.

Decision Breakdown

The Supreme Court held that the High Court was wrong to treat surety liability as all-or-nothing. Under Section 133 of the Contract Act, any variance in the loan terms made without the surety's consent discharges the surety only for transactions arising after that variance, not retroactively for the amount originally guaranteed. Since the sureties here had guaranteed only the initial Rs. 4,00,000 and had no knowledge of or consent to the borrower being allowed to overdraw further, they remained liable for that original Rs. 4,00,000 with applicable interest, but not for the excess amounts wrongly permitted by the Bank. The Court distinguished this from Section 139 (which discharges a surety only when the creditor's act impairs the surety's remedy against the principal debtor) and found no such impairment here. The appeal was allowed and the High Court's order was set aside, restoring surety liability to the extent of Rs. 4,00,000.

Lesson Learnt

A guarantor's liability is capped at what was actually guaranteed. If a bank later lets the borrower draw beyond the agreed limit without the guarantor's consent, the guarantor is not automatically freed of all liability, only from the excess amount. Guarantors should get clear, contemporaneous notice of any changes to the loan they have guaranteed.

Official source (sci.gov.in)View Judgment (PDF)

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