In a significant ruling on the liability of guarantors, the Supreme Court has clarified that sureties cannot be made responsible for loan amounts that exceed what they originally agreed to guarantee.
The decision came in an appeal filed by Bhagyalaxmi Co-Operative Bank Ltd. against the legal representatives of a borrower and two guarantors. The judgment was delivered by a Bench comprising Justice B.V. Nagarathna and Justice Ujjal Bhuyan on February 27, 2026.
The Court set aside an earlier order of the Gujarat High Court and restored the limited liability of the sureties.
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Background of the Case
The dispute dates back to 1993, when a trading firm obtained a cash-credit facility of ₹4 lakh from the appellant bank. Two individuals stood as guarantors for the sanctioned amount.
However, according to the bank, the borrower withdrew amounts far beyond the sanctioned ₹4 lakh. When the loan turned irregular, the bank initiated recovery proceedings for nearly ₹27 lakh along with 21% annual interest.
Initially, the Board of Nominees held only the principal borrower liable and dismissed the claim against the guarantors. On appeal, the Gujarat State Co-Operative Tribunal directed recovery of ₹4 lakh from the sureties as well.
But the Gujarat High Court later set aside that order, holding that the guarantors could either be liable for the entire amount or not at all. It reasoned that allowing overdrawals without informing the sureties discharged them completely.
The bank then approached the Supreme Court.
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The Legal Issue Before the Court
The central question was whether the sureties were discharged entirely under Section 139 of the Indian Contract Act, 1872, or only partially under Section 133.
Section 133 states that if the terms of a contract between borrower and creditor are changed without the surety’s consent, the surety is discharged only for transactions that happen after such change.
On the other hand, Section 139 applies where the creditor’s actions impair the surety’s remedy against the borrower.
Court’s Observations
After examining the provisions and earlier judgments, the Bench made an important distinction.
“The discharge of the surety is not absolute in nature,” the Court observed, explaining that Section 133 clearly limits discharge only to transactions subsequent to the variation.
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The judges noted that in this case, the guarantors had agreed to stand surety only for ₹4 lakh. The bank permitting overdrawals beyond that amount was a variation of the original contract.
However, the Court rejected the argument that the guarantors were fully discharged under Section 139.
“For Section 139 to apply,” the Bench explained, “there must be impairment of the eventual remedy of the surety against the principal debtor.”
In the present case, although the bank allowed excess withdrawals, there was no evidence that the sureties’ legal remedy against the borrower had been impaired.
The Court emphasized that the High Court’s view-that guarantors must be liable for the entire loan or none at all-was legally incorrect.
“That bifurcation deemed impermissible by the High Court is, in fact, mandated by the statute,” the Bench clarified.
Decision of the Supreme Court
Allowing the appeal, the Supreme Court held that:
- The sureties are liable only to the extent of ₹4 lakh, the amount originally sanctioned.
- They are not liable for the excess amounts withdrawn by the borrower beyond the sanctioned limit.
- The Gujarat High Court’s order dated June 25, 2008, was set aside.
The Court concluded that the case squarely falls under Section 133 of the Indian Contract Act, not Section 139.
The parties were directed to bear their own costs
Case Title: Bhagyalaxmi Co-Operative Bank Ltd. v. Babaldas Amtharam Patel (D) Through LRs & Ors.
Case No.: Civil Appeal No. 3200 of 2016
Decision Date: February 27, 2026
