A surety is not discharged unless the creditor's wrongful act or negligence can be proven to have caused the loss of security.

JUDGMENT:

AMIT BORKAR, J.

1. The petitioner bank challenges the judgment and order passed by the Cooperative Appellate Court. By that order, the Appellate Court discharged respondent No.1 from his liability as a surety under Sections 139 and 141 of the Contract Act.

2. The petitioner is a multi state cooperative bank. It had granted various financial facilities to respondent Nos.2 to 5 who are the borrowers. Respondent No.1 stood as guarantor for these facilities by executing a Hypothecation Agreement dated 2 February 1994. He also executed a Demand Promissory Note dated 31 March 1998.

3. The borrowers defaulted. Hence, the petitioner recalled the facilities by issuing a Demand Notice dated 14 February 2001. Thereafter, the petitioner filed Dispute CC No.433 of 2001 before the Cooperative Court. It was later renumbered as CCT No.327 of 2005. The guarantor was arrayed as OP No.8. The petitioner claimed Rs.40,83,179 from the guarantor based on the Hypothecation Agreement and the Demand Promissory Note.

4. The Cooperative Court allowed the petitioner’s claim against both the borrowers and the guarantor on 25 October 2017. The borrowers did not challenge that decision. The guarantor filed Appeal No.120 of 2017 before the Maharashtra State Cooperative Appellate Court. His appeal was restricted to the question of his liability under the order. The Appellate Court allowed the appeal on 27 December 2021. It held that the guarantor stood discharged since the borrowers had sold the hypothecated stock-in-trade in breach of the Hypothecation Agreement. The present writ petition challenges that order.

5. Learned counsel Mr. Shadab Jain for the petitioner submits that the Appellate Court misread Sections 139 and 141 of the Contract Act. According to him, mere sale or loss of security by the borrowers does not discharge the surety. To claim discharge under Sections 139 and 141, the guarantor must prove negligence of the creditor. It must be shown that the creditor did something or failed to do something. That act or omission must be inconsistent with the rights of the surety. The contract of guarantee must cast a duty on the creditor. Only then, if due to that omission the security is lost, the surety may claim discharge. He relies upon the judgment of the Gujarat High Court in Mahendra Kantilal Dave v. Mahekchowk Cooperative Bank Ltd. , AIR 2007 Guj 188.

6. Mr. Shadab Jain submits that the security was in the nature of book debts and stock-in-trade. It was always in possession of the borrowers. The Hypothecation Agreement clearly states this in clause iv. Since it was a hypothecation and not a pledge, custody and control of the security always remained with the borrowers.

7. He submits that under clauses (ix) and (xi) of the Hypothecation Agreement, the bank had a right to inspect the security. There was no duty cast on the bank to care for or protect the security. The duty to safeguard the security lay upon the borrowers. The Appellate Court has not recorded any finding that the bank was negligent. It discharged the guarantor only because the borrowers sold the security. The borrowers were expressly prohibited from selling the security under clause iv of the Hypothecation Agreement. Hence, the guarantor cannot take advantage of the borrowers’ breach to avoid his liability.

8. He submits that the guarantor has expressly waived his right to claim discharge under Sections 139 and 141 of the Contract Act. Clauses (xxiii), (xxix) and (xxx) of the Hypothecation Agreement record such waiver. He relies on the judgment of Mukesh Gupta v. SICOM Ltd., AIR 2004 Bom 104.

9. He submits that the Appellate Court ignored the Demand P