Rajani Ranjan Sahu pledged a flat in Patna as security for a loan the bank extended to Ashok Auto Enterprises, and for years that guarantee sat quietly in the background while the loan was serviced. It stopped sitting quietly once the original loan was restructured and the bank sanctioned a fresh credit facility to Ashok Auto Enterprises, without Sahu ever executing a new guarantee or formally extending the old one to cover the new arrangement.
When the restructured facility also ran into trouble, Canara Bank treated Sahu's original guarantee as if it automatically carried over to the new, substituted facility, and proceeded to enforce the security under the SARFAESI Act. The flat Sahu had pledged was sold in 2015 for Rs 28.60 lakh, a figure that stood in stark contrast to the Rs 71.30 lakh valuation the same property had carried back in 2011, a gap that itself became part of the grievance Sahu brought before the High Court.
Justice G. Anupama Chakravarthy was not willing to let the bank's assumption stand unchallenged. The judgment holds that a bank cannot simply rely on a guarantor's failure to formally seek a discharge as proof that the guarantee continued to cover whatever replaced the original facility. The burden runs the other way: it is for the bank to demonstrate, affirmatively, that the terms of the guarantee itself extend to the restructured or subsequent credit facility before it can treat the guarantor's property as fair game for a SARFAESI sale.
That allocation of the burden matters because restructuring a loan is, in substance, often a different transaction from the one the guarantor originally agreed to stand behind. A guarantor who signs up to back a specific facility, on specific terms, has not necessarily signed up to back whatever new facility the bank and the borrower later agree between themselves, particularly where the guarantor played no part in negotiating or consenting to the restructuring. Treating silence from the guarantor as consent, rather than requiring the bank to point to language in the guarantee that actually covers the new facility, would let banks expand a guarantor's exposure well beyond what was bargained for.
On that basis, the Court quashed the SARFAESI sale of Sahu's flat, finding that Canara Bank had failed to establish the guarantee's continuing application to the loan as restructured. The order does not say the bank can never recover against a guarantor after a restructuring; it says the bank has to do the work of showing the guarantee covers the new arrangement, through its own documentation, rather than assuming continuity because the guarantor never objected or sought a discharge in the interim. That gap between what the bank assumed and what it could actually document is what decided the case, more than any dispute over whether Sahu had originally agreed to stand behind Ashok Auto Enterprises at all.
For lenders restructuring stressed loans backed by third-party guarantees, the practical lesson is to revisit the guarantee documentation at the point of restructuring itself, either by securing a fresh guarantee for the new facility or by obtaining the guarantor's explicit written consent that the existing guarantee will extend to the restructured terms. Skipping that step leaves the enforcement action vulnerable exactly as it did here, with a guarantor able to argue years later that whatever he originally agreed to back no longer matches what the bank is now trying to recover against his property.
Guarantors, for their part, should not assume that silence protects them, but the ruling does give them a real argument to raise where a bank moves against pledged property on the strength of an old guarantee without ever showing that the guarantee's language reaches the facility actually in default. The gap between the 2011 valuation and the 2015 sale price in this case is also a reminder that courts reviewing SARFAESI sales will look past the bank's bare entitlement to enforce security and ask whether the underlying guarantee, and the sale conducted under it, were properly grounded in the first place.