Presented By:Pankaj Kothari

Principal Debtor

Creditor

Surety / Guarantor

Promise by a third person (Surety/Guarantor) to pay a the Creditor a debt owed by Debtor in the event the Debtor does not pay. Rights of surety can be against principal debtor, creditor and co-surety.

Rights of subrogation U/s 140 Rights of Indemnity U/s 145 Rights to security U/s 141 Rights to co-surety U/s 138 Liability of contribution U/S 146 Liability towards co-surety U/s 147

Right of subrogation:Rights of surety on payment or performance u\s.140. Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payments or performance of all that he is liable for ,is invested with all the rights which the creditor had against the principal debtor.

Eg:- A lends money to B, and C guarantees to A for the debt. If B becomes default then C has liability to payback the debt to A, after paying debt to A ,C therefore, can sue B in rights of A. In the case, if principal debtor insolvent, the surety cannot ask the creditor first to pursue his remedy against the principal debtor.

Implied promise to indemnify surety u\s. 145 In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has right fully paid under the guarantee , but no sums which he has paid wrong fully .

Eg:- B indebted to C ,and A is surety for that C demand payment from A on his refusal sues him from the amount. A defends the suit , having reasonable ground so for doing so but is compelled to pay the amount of the debt with cost . He can recover from B the amount paid by him for cost , as well as the principal debt . Eg:- A guarantees to C , to the extent of Rs.2000 ,payment for rice to be supplied by C to B . C supplies to B rice to a less amount than Rs. 2000, but obtains payment of the sum of Rs.2000 in respect of rice supplied A cannot recover from B more than the price of the rice actually supplied .

Where surety had guaranteed the payment of four motor vehicle delivered on hire purchase. The surety contended that he had paid Rs.4000 in discharge of his liability, but he failed to give an account of the price which the motor vehicles might have realized on resale. He was not allowed to recover his indemnity.

Right to securities Suretys right to benefit of creditors securities U/s 141: A surety is entitled to the benefit of every security which the creditors has against the principal debtor at the time when the contract of suretyship is entered into, whether surety knows of the existence of such security or not;and,if the creditor losses, or without the consent of the surety, parts, with such security, surety is discharged to the extent of the value of the security .

Eg:- C advances to B, his tenant, Rs 2000 on the guarantee of A. C has also a further security for the Rs 2000 by mortgage of B s furniture. C cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharge from liability to the amount of the value of the furniture. If creditor loses the security possessed by him at the time of making of the contract ,that results in the discharge of the surety to that extent .

Kaluram was a surety for the payment of felled trees which were sold by the state to one jagat ram, the buyer or tree was to make payment in four equal instalments .He paid only one Instalment and then default. The appellant had right under contract to prevent the purchaser from removing the trees when he defaulted but they failed to do so. The court held that the appellant , by allowing the buyer to take away the trees, had allowed the security to be lost, and surety was, therefore, discharge to that extent.

Where surety has guarantee only a part payment of the debt and he pays the same. Gorvardhandas vs Bank of Bengal 1891 Bom. Certain mortgage were given to bank as security for debt amounting to rs 3,15,000. The plaintiff, who was a surety in part of rs 1,25,000, paid his part and claimed that he was entitled to that extent in the place of the bank and receive the share of the proceeds of the said security proportionate to the sum that he has paid. The court held that creditors rights to security is paramount to the surety's claim over them and therefore, the creditor cannot be asked to part any of the security until his claim is fully satisfied .

There is an contrary view expressed by madras high court in Bhushaya vs Suryanarayana 1944 Mad. 340 The Imperial bank advances three different loans to a person with three different sureties for each loans. The principal debtor defaults, and therefore, bank obtained mortgage of the property. The first two sureties paid their part and the third defaults.

 Krishnaswamy Ayyangar J held that Sec 140 expressly says that surety upon payment of all the liability that is entitled to, immediately invested, with all the rights which the creditor had against the principal debtor. Where the guaranteed debt is fraction only for the debt ,the surety's right come into existence immediately on payment of that fraction, for that fraction is, so far as he concerned, the whole. The learned judges then considered Indian law and English authorities and came to a conclusion that a surety for a part only for a debt is the payment of the part entitled pro tanto to the security held by the creditor as a cover for the debt as a whole.

Rights against co sureties

Release of one co-surety does not discharge other u/s 138Where there co-surety, a release by the creditor of one of them does not discharge the other; neither does it free the surety so released from his responsibility to the other sureties. Eg;-A , B and C gives guarantee to Z for debt to X, for Rs 3000, C was released by Z but does not discharge C from his liability to contribute towards claim.

Co sureties liable to contribute equally u/s 146

Where two or more persons are Co- sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co- sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor. Eg;- A, B and C are sureties to D for the sum of 1, 000 rupees lent to E, and there is a contract between A, B and C that A is to be responsible to the extent of one- quarter, B to the extent of one- quarter, and C to the extent of onehalf. E makes default in payment. As between the sureties, A is liable to pay 250 rupees, B 250 rupees, and C 500 rupees.

It did not matter that the surety had paid the amount to the principal debtor for the purpose of payment to the creditor, and not directly to the creditor. Mahoney vs McManus(1859) Two directors of a company gave guarantee to some of company's creditor. The creditors demand payment and company was unable to pay. One of the surety director gave fund to the company to pay those creditors on terms that company would pay him interest on this amount of advance. The company use that money to pay the creditors. The director claim contribution from other director for this amount . It was held that the amount was paid to the company not as loan, but as payment under guarantee ,and hence the director was entitled to pay his contribution to the other director.

Liability of co- sureties bound in different sums u/s 147.Co- sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.
Eg:- A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10, 000 rupees, B in that of 20, 000 rupees, C in that of 40, 000 rupees, conditioned for D' s duly accounting to E. D makes default to the extent of 30, 000 rupees. A, B and C are liable to pay 10, 000 rupees.