Details are insufficient for giving guidance .
1.Borrower sold the property under mortgage to settle the outstanding liability through OTS
While selling the mortgaged property to settle outstanding, whether there is consent from Bank and guarantor for OTS in writing. Who has purchased the property ? Whether Guarantor has purchased the property ? Who initiated litigation on such property ? What are the family relations in between borrower, guarantor, purchaser ?
2.At the time of loan application, Guarantor had shown the source of income from 'another' property which is not under mortgage.
Whether the property was mortgaged or not mortgaged, Guarantor has equal footing at par with borrower towards obligations to Lending Bank. Banker, can exercise Right of General Lien on all properties standing in the name of both Borrower and guarantor. If there was any alienation during the course of litigation, he can even report it as a fraud to DRT.
Bank can attach all the properties through tribunal whether mortgaged or not, and banker depends on outside agents and collects such certified copies fo sale deeds, Tax payment records to convince tribunal that the properties belong to borrower or Guarantor.
However, if the Bank has made any change in terms and conditions without involvement of guarantor directly, there is a chance of denying the liability after such understanding in between borrower and bank without consent / participation of Guarantor.