Section 40 of the Negotiable Instruments Act,1881.
Where the holder of a negotiable instrument, without the consent of the indorser, destroys or impairs the indorser’s remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.
Illustration. A is the holder of a bill of exchange made payable to the order of B, which contains the following indorsements in blank
This bill A puts in suit against John Rozario and strikes out, without John Rozario’s consent, the indorsements by Peter Williams and Wright & Co. A is not entitled to recover anything from John Rozario.
This section deals with the discharge of an indorser by the act of a holder of the instrument The liability of the indorser of an instrument to the holder is the liability of a surety the indorser being a surety of all prior parties. Therefore, when on account of the default of payment of the principal debtor, the indorser pays the amount covered by the instrument to the holder, he becomes automatically entitled to recover the amount from all prior parties to the instrument. It, therefore, follows that if the holder does anything calculated to impair or destroy such remedy of the indorser against the prior parties, without his consent, the indorser's liability will stand discharged and the holder will not be competent to realise anything from him. As will be seen from the illustration to the section all subsequent indorsers will be discharged from their liability if the holder strikes out the name of any prior indorser as it will impair the remedy of the subsequent indorser against the prior ones. The contracts of several indorsers are like so many links of a pendant chain, if the holder dissolves the first, every link falls with it. If he dissolves an intermediate link, all after it are likewise dissolved But the last link supports nothing and its dissolution injures no one.
Besides the striking out of the names of the parties there is another kind of act of the holder which may impair the indorser’s remedy against the prior parties and may, therefore, lead to his discharge. That is, when the holder destroys or impairs the securities to which the indorser becomes entitled after payment. The same rule is applicable to the indorser of a promissory note that applies to the indorser of a bill of exchange, that if he pay's the holder of it, he is entitled to the benefit of the securities, given by the maker in the one case, the acceptor in the other, which the holder has in his hands at the time of the payment and upon which he has no claim except for the note or the bill. And when the holder impairs or destroys such securities without his consent the indorser is discharged from liability.