Rights of Surety in a Contract of Guarantee

In this blog, we are discussing the rights of the surety in a contract of guarantee. But who is a surety? Under a contract of guarantee, a surety is a person who gives the guarantee to the creditor that he shall make the payment of the debt if the principal debtor defaults on it. Hence, the surety kind of acts on behalf of the principal debtor and undertakes for the payment of debts of the principal debtor. However, it should be noted that after making the payment and discharging the liability of the principal debtor, the surety is entitled to various rights. Let us find them out in the paragraphs below:

What are the Rights of Surety?

A surety holds certain rights against the creditor (under Section 141 of the Contract Act), against the principal debtor (under Sections 140 and 145) and against the co-sureties (under Sections 146 and 147). These rights of the surety are explained as follows:  

A) Rights of Surety against Creditor

Under Section 141, a surety is entitled to receive the benefit of every security that the creditor has got against the principal debtor at the time of entering into the contract of suretyship. He is entitled to this benefit whether he is aware of the existence of such security or not. Moreover, if the creditor loses or parts with such security without obtaining the consent of the surety, the surety is discharged from his liability to the extent of the value of the security.

For example, A has lent Rs. 15,000 to B on C’s guarantee. This debt is additionally secured by an assignment deed, which is the lease of B’s house. B fails to pay the debt, and C is compelled to do so. Here, C is entitled to receive the assignment deed in his favour after paying off B’s liabilities.

B) Rights of Surety against Principal Debtor

After the debt is discharged, the surety takes the place of the creditor or is subrogated to all of the creditor’s rights against the principal debtor. He can then sue the principal debtor for the amount he paid to the creditor in the event of the debtor’s default. For what he has paid, he becomes a creditor of the principal debtor.

This right of the surety is called the “right of subrogation”. It indicates that the surety steps into the shoes of the creditor upon payment of the guaranteed debt or fulfillment of the guaranteed duty. (Section 140).

Another right that the surety holds against the principal debtor is the “right of indemnity” (Section 145 of the Contract Act). In every contract of guarantee, the principal debtor makes an implied promise to indemnify the surety, and the surety has the right to recover from the principal debtor whatever amount he has legally paid under the guarantee. But the surety has no right to recover any monies he has unlawfully paid.

To understand this with the help of an example, suppose B owes C some money, and A is the surety. C requests payment from A and, when he refuses, sues him for the amount. A defends the lawsuit on reasonable grounds, but he is compelled to pay the amount of the debt plus costs. Now, he (i.e., A) can recover from B both the costs he paid and the principal debt.

C) Rights of Surety against Co-sureties

In cases where more than one individual guarantees the repayment of a debt to the principal debtor, they are collectively referred to as co-sureties.

When a surety pays more than his part of the debt to the creditor, he is entitled to get a contribution from the co-securities who are equally obligated to pay with him.

For example, A, B, and C are sureties to D for a loan of Rs. 3,000 provided to E, who defaults on the loan repayment. A, B, and C (as co-sureties) are responsible to pay Rs. 1,000 each. If one of them has to pay more than Rs. 1,000, he can claim contributions from the other two to bring his total payment down to Rs. 1,000 only. If one of them becomes insolvent, the other two must equally contribute to the unpaid amount.

Relevant case laws

Mamta Ghose vs. United Industrial Bank (A.I.R. 1987 Cal. 180): Surety’s rights against the principal debtor before payment

In some specific cases, certain rights may be granted to the surety even before payment of the debt. That is to say that before and after payment, the surety has rights against the principal debtor. The Court granted an injunction to the surety in the case of Mamta Ghose vs. United Industrial Bank (1987), where the principal debtor began selling off his property after discovering that the obligation had become due in order to avoid seizure by the surety. The Court restrained the principal debtor from doing so. After the debt has become due, the surety may compel the debtor to pay the debt and release him from liability.

Conclusion

The rights of a surety can be divided into three parts: a) rights against the creditor, b) rights against the principal debtor and c) rights against the co-sureties. He has the rights of subrogation and indemnity against the principal debtor, the right of recovering security against the creditor, and the right of contribution against the co-sureties.


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Ruchi Gandhi

The author enjoys to write informational content in the domain of company law and allied laws. She takes interest in doing thorough and analytical research on legal topics. She is a CA along with MBA (Fin) and M. Com.

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