In a significant ruling for the cooperative banking sector, the Supreme Court of India has held that loan guarantors cannot be made liable for amounts withdrawn beyond the sanctioned limit without their consent.
The judgment came in Bhagyalaxmi Co-operative Bank Ltd. vs Babaldas Amtharam Patel, arising from a 1993 loan dispute. M/s Darshak Trading Company had obtained a cash-credit facility of Rs 4 lakh from Bhagyalaxmi Co-operative Bank, with two individuals standing as guarantors for the loan.
The borrower later withdrew amounts far exceeding the sanctioned limit and eventually defaulted, leading the bank to file a recovery suit for over Rs 26.95 lakh.
The Supreme Court held that under Section 133 of the Indian Contract Act, any variation in the contract between the creditor and the borrower made without the guarantor’s consent discharges the guarantor from liability for transactions occurring after such variation.
Setting aside the Gujarat High Court’s view, the Court ruled that the guarantors remain liable only for the original Rs 4 lakh loan along with interest, and not for the excess withdrawals made beyond the sanctioned limit.
The ruling clarifies the extent of guarantor liability and is expected to guide banks and cooperative institutions in enforcing loan guarantee agreements.
