Guarantee stands even if revoked by loan guarantor

The Supreme Court of India has reiterated through a decision that a guarantor cannot back out of the loan commitment once made.

A guarantor, Sita Ram Gupta, filed a case citing Section 130 of the Indian Contract Act which provides for revocation of guarantee by prior notice to the creditor. Gupta was asked by Punjab National Bank to pay up the decreed amount of Rs 42,874, including interest at the rate of 19.5 per cent per annum.

The loan was taken in 1980. Gupta cancelled his guarantee through a letter dated July 31, 1980. He said that he was not liable to pay the loan as the guarantee was withdrawn. He cited Section 130 of the Indian Contract Act which provides for revocation of guarantee by prior notice to the creditor.

The clause relating to the loan guarantee and the loan guarantor is included in the fine print which reads, 'The guarantor hereby guarantees... to pay the bank on demand all principal, interest, costs, charges and expenses due and which may at any time become due to the bank from the borrower down to the date of payment'.

The agreement stated that 'the guarantors hereby declare that this guarantee shall be a continuing guarantee and shall not be considered as cancelled or in any way affected...'

Based on the clauses mentioned above, a decision was taken that Gupta is liable to pay the debt.

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