Rights of a surety - notes PDF

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RIGHTS OF A SURETY Surety's liability: The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. The provision that the surety’s liability is coextensive with that of the principal debtor means that his liability is exactly the same as that of the principal debtor. It means that on a default having been made by the principal debtor the creditors can recover from the surety all what he could have recovered from the principal debtor.

Surety’s rights: A surety has the following rights: Rights of Surety can be classified into three groups, as follows1. Rights against Creditor 2. Rights against Principal debtor 3. Rights against Rights against Co-Sureties. 1. Rights against the Creditor As per section 141, a surety is eligible to the benefit of every security which the creditor has against the principal debtor. Also, when the creditor losses or parts with such security without the consent of the surety, this discharges the surety to the extent of the value of such security. Rights against creditor can be further classified asA. Right of subrogation: A subrogation means substitution of one person for another.Where a guaranteed debt has become due or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is vested with all the rights which the creditor had against the principal debtor. The right of the surety is known as the right of subrogation namely the right to stand in the shoes of the creditor. right of subrogation after performing his duty or making a payment to the creditor.

B. Right to securities: The surety is entitled to the benefit of all securities made available to the creditor by the principal debtor whether the surety was aware of its existence or not. C. Right to indemnity: When a contract of guarantee is entered into there is an implied promise that the principal debtor will indemnify the surety for all the payments rightfully made by him. If he has made any payments wrongfully he will not be able to recover any amounts. This has been stated in section 145. Example: Rahul has to pay Rs. 2,00,000 to Mahesh. Venkat is the surety for the debt. Mahesh demands the payment from Rahul on the due date. Rahul fails to pay the amount. Venkat who is the surety is compelled to make the payment on behalf of Rahul. Venkat has the right to recover the amount from Rahul with all the benefits promised to Mahesh as he has now acquired the right of a creditor. D. Right of set off: If the creditor sues the surety, he can claim set-off or counter claim, which the debtor had against the creditor. Example: Deepak took a loan from Sohan for Rs. 8,50,000. Somu guaranteed the loan. Somu also had a claim on Sohan for Rs. 3,00,000. In case of Deepak defaulting in repayment of the loan, Somu is liable to pay Rs. 5,50,000 to Sohan. Somu will also claim the benefit of this set-off although he does not have any personal claim on Sohan.

2. Rights against the Principal Debtor Once the surety discharges the debt, he obtains the rights of a creditor against the principal debtor. He can now sue the principal debtor for the amount of debt paid by him to the creditor due to the default of the principal debtor. In a case where the principal debtor on discovering that the debt has become due, starts disposing of his properties in order to prevent seizure by the

surety, the surety can compel the debtor to pay the debt and discharge him from his liability to pay.Rights against the principal debtor areA. Rights of subrogation(Section 140): When the principal debtor makes a default in the performance of his duty, and on such a default, the surety makes the necessary payment or makes performance of all what he is liable for he becomes invested with all the creditor had against the principal debtor. In other words, the surety steps in to the shoes of the creditor and by an action against the principal debtor, he can recover from him all that, which could have been recovered by the creditor. This is known as surety’s right of subrogation. B. Rights of indemnity against the principal debtor(sec.145): In a contract of guarantee, when the principal debtor makes a default, the surety has to make payment to the creditor. This payment is made by the payment to the creditor. This payment is made by him on behalf of the principal debtor. After making such payment, he can recover the same from the principal debtor. Such a claim can be made by the surety only in respect of the sums he has rightfully paid under the guarantee, but not the sums which he has paid wrongfully.

3. Surety’s rights against the co-sureties When there is more than one surety to guarantee a debt they are called co-sureties. In case of default all the sureties become liable towards the contribution of the guarantee amount. Rights of the surety against co-sureties are as follows: 1. Right to contribution: Under Section 146 of the Indian Contract Act, wherever there are cosureties for the same amount, they are liable to share an equal amount of the debt which remains unpaid by the principal debtor. When a surety pays more than his share to the creditor, he has a right of contribution from the co-sureties, who are equally liable to pay. For example, A, B, and C are the co-sureties to D for a sum of ₹30000 lent to E who made default in payment.Thus, A, B, and C are liable to pay ₹10000 each as between them. So, in this case, if anyone of them pays more than ₹10000, he can claim the excess from the other two co-sureties so as to reduce his

payment to ₹10000 only. However, if one of the co-sureties becomes insolvent, the other cosureties shall contribute his share equally. ....