Guarantor discharge on compromise without consent bars enforcement of securitisation notice against the surety.

A guarantor's liability may be discharged where the creditor bank and the principal borrower enter into a compromise that varies the original repayment arrangement without the guarantor's consent. In suretyship, a material alteration or substituted settlement between creditor and principal debtor can end the surety's obligation if the guarantor did not assent to the change. The commentary further notes that, on this footing, a notice issued under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 would not be enforceable against the guarantor once the compromise has attained finality, because the bank can no longer proceed on the settled claim against that surety.

---

---

Issues: Whether a guarantor stands discharged when the creditor bank and the principal borrower enter into a compromise and whether a notice issued under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 can be enforced against such guarantor.

Analysis: The compromise entered into between the bank and the principal borrower, without the assent of the guarantor, amounted to a variation in the original contractual arrangement governing liability. In the context of suretyship, a material change in the terms of repayment or a substituted arrangement between creditor and principal debtor may discharge the surety where the surety has not consented to the alteration. The notice under the securitisation law proceeded on the basis that the guarantor continued to remain liable despite the compromise, but the Court held that the guarantor's obligation had come to an end once the compromise between the bank and the principal borrower attained finality. The challenge to the notice was therefore maintainable on the footing that the bank lacked authority to proceed against the guarantor for the settled claim.

Conclusion: The guarantor was held to be discharged from liability arising out of the compromised loan transaction, and the notice under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was quashed.

---