Surety discharge under compromise scheme rejected where guarantor consented to the variation and creditor's rights were preserved.

A sanctioned compromise scheme did not, on these facts, discharge the guarantor because the guarantor was a confirming party to the tripartite arrangement and had consented to the variation in the original lending terms. The law of guarantee therefore left the surety's liability co-extensive with the principal debtor's, and the discharge provisions in Sections 133, 134 and 135 of the Indian Contract Act, 1872 were not attracted. The Companies Act scheme did not by itself extinguish the creditor's rights against the surety, unless the guarantee contract so provided. The request to delete the condition preserving the creditor's right against the guarantor was rejected.

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Issues: Whether the guarantor or surety stood discharged by the sanctioned compromise scheme and the principal debtor's full and final settlement with the secured creditor, and whether the review application could be granted to delete the direction preserving the creditor's right against the guarantor.

Analysis: The scheme was not a mere unilateral release of the principal debtor. It was a tripartite compromise and arrangement in which the guarantor was a confirming party and had consented to the variation in the original lending terms. On that footing, the case fell within the principle that a surety is not discharged where the variation or composition is made with the surety's consent. The liability of a surety remains co-extensive with that of the principal debtor under the law of guarantee, and the statutory grounds of discharge under Sections 133, 134 and 135 of the Indian Contract Act, 1872 were not attracted on these facts. The Court also held that a scheme sanctioned under the Companies Act, 1956 does not, by itself, extinguish the creditor's rights against the surety unless the contract of guarantee so provides. The right of the surety to proceed against the principal debtor under Section 140 of the Indian Contract Act, 1872 did not make the creditor's preserved right against the guarantor unlawful.

Conclusion: The guarantor was not discharged, and the request to delete the condition preserving the creditor's right to proceed against the guarantor was rejected.

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