Discharge of Principal Debtor in Banking Contracts of Guarantee

The discharge of the principal debtor in a banking contract of guarantee means that the surety is no longer liable to the creditor for the principal debtor’s debts. The surety can be discharged from their liability in a number of ways, including:

• Payment of the debt by the principal debtor: If the principal debtor pays off their debt, the surety is discharged from their liability.
• Agreement between the creditor and the principal debtor: The creditor and the principal debtor may agree to release the principal debtor from their debt. This will also discharge the surety from their liability.
• Bankruptcy of the principal debtor: If the principal debtor is declared bankrupt, the surety is discharged from their liability.
• Accord and satisfaction: This is an agreement between the creditor and the principal debtor to settle the debt for a lesser amount. If the principal debtor pays the lesser amount, the surety is discharged from their liability.
• Acknowledgment of debt by the surety: If the surety acknowledges their debt to the creditor, they will be discharged from their liability to the creditor.

MCQs on Discharge of Principal Debtor in Banking Contracts of Guarantee

1. Which of the following is not a way to discharge the surety in a banking contract of guarantee?
   • Payment of the debt by the principal debtor.
   • Agreement between the creditor and the principal debtor.
   • Bankruptcy of the principal debtor.
   • Accord and satisfaction.
   • Acknowledgment of debt by the surety.
   • Answer: Acknowledgment of debt by the creditor. The creditor cannot acknowledge the debt of the surety. Only the surety can do that.
2. The surety is discharged from their liability if the principal debtor pays off their debt. Is this always true?
   • No, this is not always true. The surety may still be liable if they have a defense against the creditor’s claim.
3. The creditor and the principal debtor may agree to release the principal debtor from their debt. This will also discharge the surety from their liability. Is this always true?
   • No, this is not always true. The creditor and the principal debtor may only release the principal debtor from their debt if the surety agrees to the release.
4. If the principal debtor is declared bankrupt, the surety is discharged from their liability. Is this always true?
   • No, this is not always true. The surety may still be liable if they have a security interest in the principal debtor’s assets.
5. Accord and satisfaction is an agreement between the creditor and the principal debtor to settle the debt for a lesser amount. If the principal debtor pays the lesser amount, the surety is discharged from their liability. Is this always true?
   • No, this is not always true. The surety may still be liable if they have not agreed to the accord and satisfaction.