DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY, LUCKNOW

2020-21
FINAL DRAFT
Rights Available to a Surety After Making Payment to the
Creditor

SUBMITTED TO: SUBMITTED BY:

Dr. Visalakshi Vegesna MOHD. ASHAD

Associate PROFESSOR (LAW) 3rd SEMESTER(ROLL. NO. 94)

SECTION: A
Acknowledgements

First of all I would like to thank our Hon’ble Vice-Chancellor Dr. S.K. Bhatnagar, our Dean
(Academics) Prof Dr. C.M. Jariwala, and our very own Associate Professor (Law) , HOD
(Department of Legal Studies) for letting me research on such an interesting topic and providing
all the necessary resources required to fulfill it successfully.
I would also like to thank my seniors and my dear batch-mates for providing the necessary
mental support to complete this project.
INDEX:

 Introduction…………………..………………
 Right of surety……………………………….
 Rights against Creditor……………………….
 Right against Co-sureties…………………….
 Defenses……………………………………...
 Conclusion……………………………………
 Refrences……………………………………..
Introduction:

In the event of a decree in favor of the creditor against the principal debtor the wings of the
decree can also be extended against the sureties as their liability in coextensive with the principal
debtor. A surety is a person who comes forward to pay the amount in the event of the borrower
failing to pay the amount. 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. For instance, the principal debtor makes a default in the payment of a debt of Rs. 10000/.

Surety:

A surety is a person who comes forward to pay the amount in the event of the borrower failing
to pay the amount. In the event of a decree in favor of the creditor against the principal debtor the
wings of the decree can also be extended against the sureties as their liability in coextensive with
the principal debtor. But when a suit against the principal debtor was dismissed for default and
the decision became final there being no liability surviving against the debtor the surety’s
liability gets automatically terminated.

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 debt Rights available to Surety
against the Principal Debtor

 Right of surety on payment or performance (Subrogation

Rights)
According to Section 140 of the Indian Contract Act 1872, 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 invested with all the rights which the
creditor had against the principal debtor. The origin and nature of the right of subrogation, was
laid down wherein it was held that a surety who has performed the obligations of the principal
which are the subject of his guarantee is entitled to stand in the shoes of the creditor and to enjoy
all the rights that the creditor had against the principal. This is an equitable right. It is a right that
arises out of the relationship between of surety and creditor itself. Conceptually this is an
important point, as the subrogate will take the subrogator’s security rights by operation of law,
even if the subrogee had been unaware of them. Accordingly, in this area of the law at least, it is
conceptually improbable that the right of subrogation is based upon any implied term.

The Supreme Court has laid down in Amrit Lai Goverdhan Lalan v State Bank of Travancore 1
that the surety will be entitled to every remedy which the creditor had against the principal
debtor; to enforce every security and all means of payment; to stand in the place of the creditor;
to have the securities transferred to him, though there was no stipulation for that; and to avail
himself of all those securities against the debtor. This right of surety stands not merely upon
contract, but also upon natural justice. The language of Section 140 which employs the words "is
invested with all the rights which the creditor had against the principal debtor" makes it plain
that even "without the necessity of transfer, the law vests those rights in the surety". It was
decided by the Bombay High Court in State Bank of India v Fravina Dyes Intermediate 2 that the
guarantor by invoking the doctrine of subrogation can apply for a temporary injunction against
the debtor even before making payment to the creditor if he apprehends that the debtor threatens
or is about to remove or dispose of his property with intent to defraud the creditor. That is, the
guarantor is entitled to a grant of injunction against the principal debtor under certain
1
Amrit Lai Goverdhan Lalan v State Bank of Travancore AIR 1968 SC 1432.
2
Bombay High Court in State Bank of India v Fravina Dyes Intermediate AIR 1989 Bom 95.
circumstances.
Under the right of subrogation the surety may get certain rights even before payment. The
Calcutta High Court examined this possibility in a case where the surety found that the amount
having become due, the principal debtor was disposing of his personal properties one after the
other lest the surety, after paying, may seize them and the surety sought a temporary -injunction
to prevent the principal debtor from doing so. The court granted the injunction. Thus the surety
has remedies against the principal debtor under two heads, viz., before payment and after
payment. He can compel the debtor, after the debt has become due, to exonerate him from his
liability by paying off the debt.

 Right to Indemnity
Indemnity and guarantee have this common feature that both are devices for providing protection
against a probable loss. In either case the loss may arise due to human conduct. However, the
technique of providing protection, the need and occasion for protection and the number of parties
involve mark some differences between them. “Guarantees and indemnities, which are also
described as securities, are distinct arrangements under which a third party, the surety, agrees up
to assume liability if the debtor defaults or causes loss to the creditor. The former arrangement is
a guarantee, the latter involves an indemnity.”
According to Section 145 of the Indian Contract Act, 1872 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 rightfully paid under the guarantee, but
no sums which he has paid wrongfully. The concept of rightful payment is illustrated by a
Karnataka decision in the case of Chekkera Ponnamma v AS Thammayya.3

 Rights available to Surety against the Creditor

According to Section 141 of the said Act, a surety is entitled to the benefit of every security
which the creditor has against the principal debtor at the time when the contract of suretyship
entered into, whether the surety knows of the existence of such security or not; and if the creditor
loses, or without the consent of the existence of such security or not; and if the creditor loses, or
without the consent of the surety, parts with such security, the surety, the surety is discharged to
the extent of the value of the security.

The Section identifies the general rule of equity as observed in a Craythorne v Swinburne4 that
the surety is entitled to redress which the creditor has against the principal debtor, including
3
Chekkera Ponnamma v AS Thammayya AIR 1983 Kant 124.
4
Craythorne v Swinburne (1807) 14 Ves June 160.
enforcement of every security. On paying off the creditor the surety is exactly in the same
positions as the creditor was against the principal debtor. The right exists irrespective of the fact
whether the surety knows of the existence of such security or not. “It is the duty of the creditor to
keep the securities intact; not to give them up or to burden with further advances.” 5 It was held
by the Supreme Court in State of MP v Kaluram6 that the term "Security" in Section 141 is not
used in any technical sense; it includes all rights which the creditor had against the property of
the principal at the date of the contract. The difference between the English Law and the
principle laid down in Sec 141 was explained by the Supreme Court in Amrit Lai Goverdhan
Lalan v State Bank of Travancore7 as under: "It is true that Section 141 has limited the surety’s
right to securities held by the creditor at the date of his becoming his surety and has modified the
English rule that the surety is entitled to the securities given to the creditor both before and after
the contract of guarantee. But subject to this variation, Section 141 incorporates the rule of
English Law relating to discharge from liability of a surety when the creditor parts with or loses
the security held by him". Court in the above case also held that “The equity between the creditor
and the surety is that the creditor shall not do anything to deprive the surety of his right. But the
creditor’s right to hold his securities is paramount to the surety’s claim upon such securities,
which only arises when the creditor’s claim against such securities has been satisfied.” But the
Madras High Court differed not only from this opinion but also from the fact whether this is the
effect of decisions. The case before it was Parvateneni Bhushayya v Potluri Suryanarayna.8

Right to share Reduction

This right may be illustrated by the case of Hobson v Bass9. J gave a guarantee to B in the
following words: “I hereby guarantee to you the payment of all goods you may supply to E.H.,
but so as my liability to you under this or any other guarantee shall not at any time exceed the
sum of £ 250.” E gave a similar guarantee. B supplied goods to E.H., to the amount of £ 657.
E.H. became bankrupt. B proved the whole sum in the insolvency of E.H. and then called on the
guarantors who paid him £ 250 each. Subsequently B received from the receiver a sum of 2s,
and, 1d … in the pound on £ 657. It was held that each of the guarantors was entitled to a part of
the dividend bearing to the whole the same proportion as £ 250 to 657.

Right of set-off

If the creditor owes anything to the principal debtor, the amount owed can be adjusted in the
creditor’s claim against the surety. The surety can charge from the amount to be given to the
creditor if the creditor has to pay the principal debtor back. If the creditor sues the surety, the
surety may have the benefit of the set off, if any, that the principal debtor had against the
5
Ibrahim Abdul Latif Shaikh v Corpn Bank AIR 2003 Kant 98.
6
State of MP v Kaluram AIR 1967 SC 1105.
7
Amrit Lai Goverdhan Lalan v State Bank of Travancore AIR 1968 SC 1432.
8
Parvateneni Bhushayya v Potluri Suryanarayna AIR 1944 Mad 195.
9
Hobson v Bass (1871) LR 6 Ch App 792.
creditor. He is entitled to use the defenses of the debtor against the creditor. If, for example, the
creditor owes him something, or the creditor has in his hand something belonging to the debtor
for which the debtor could have counter-claimed, the surety can also put up that counter claim.
He can claim such a right not only against the creditor, but also against third parties who have
derived their title from the creditor.10

If the creditor sues the surety, the surety may have the benefit of the set-off, if any, that the
principal debtor had against the creditor. He is entitled to use the defences of the debtor against
the creditor. If, for example, the creditor owes him something, or the creditor has in his hand
something belonging to the debtor for which the creditor could have counterclaimed, the surety
can also put up that counterclaim.11 He can claim such a right not only against the creditor, but
also against third parties who have derived their title from the creditor. Thus where a mercantile
agent sold the goods of his principal and, being a surety for payment of the price to the principal,
had to pay it, he was held to have become entitled to the unpaid seller’s lien against the buyer
and those deriving title from him.

 Right against Co-sureties (Right to Contribution)

Where a debt has been guaranteed by more than one person, they are called co-sureties. They
have certain rights against each other. In a contract of guarantee if there are more than one
surety, they are called co-sureties. Co-sureties are equally liable Creditor can sue one or all. If
only one surety is sued and he has to paid the debt then he may demand co-sureties to contribute.
According to Section 146 of the said Act, co-sureties are liable to contribute equally. 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 contract, 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.

1. Co-sureties liable to contribute equally

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. If one of them has been compelled to pay more than his share, he
can recover contribution from his co-sureties so as to equalise the loss as between all of them.12

10
Avtar Singh, Contract Law Easy Series (ch 8).
11
Bechervaise v Lewis (1872) LR CP 372.
12
Shirley v Burdett (1911) 2 Ch 418.
The creditor may at his will release any of the co-sureties from his liability. But that will not
operate as a discharge of his co-sureties. However, the released co-surety will remain liable to
the others for contribution in the event of default.

2. Liability of co-sureties bound in different sums

Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their
respective obligations permit. Where there are several sureties for the same debt and the
principal debtor has committed a default, each surety is liable to contribute equally to the extent
of the default. The principle will apply whether their liability is joint or several, under the same
or different contracts, and whether with or without the knowledge of each other. The principle of
equal contribution is subject of the maximum limit, if any, fixed by a surety to his liability. This
is so because Section 14713 lays down that “co-sureties who are bound in different sums are
liable to pay equally as far as the limits of their respective obligations permit”.

13
Indian Contract Act 1872, s 147.
Defenses of the Surety
Generally, the surety may exercise defenses on a contract that would have been available to the
principal debtor (e.g., creditor’s breach; impossibility or illegality of performance; fraud, duress,
or misrepresentation by creditor; statute of limitations; refusal of creditor to accept tender or
performance from either debtor or surety.) Beyond that, the surety has some defenses of its own.
Common defenses raised by sureties include the following:

 Release of the principal. Whenever a creditor releases the principal, the surety is
discharged, unless the surety consents to remain liable or the creditor expressly reserves
her rights against the surety. The creditor’s release of the surety, though, does not release
the principal debtor because the debtor is liable without regard to the surety’s liability.
 Modification of the contract. If the creditor alters the instrument sufficiently to discharge
the principal, the surety is discharged as well. Likewise, when the creditor and principal
modify their contract, a surety who has not consented to the modification is discharged if
the surety’s risk is materially increased (but not if it is decreased). Modifications include
extension of the time of payment, release of collateral (this releases the surety to the
extent of the impairment), change in principal debtor’s duties, and assignment or
delegation of the debtor’s obligations to a third party. The surety may consent to
modifications.
 Creditor’s failure to perfect. A creditor who fails to file a financing statement or record a
mortgage risks losing the security for the loan and might also inadvertently release a
surety, but the failure of the creditor to resort first to collateral is no defense.
 Statute of frauds. Suretyship contracts are among those required to be evidenced by some
writing under the statute of frauds, and failure to do so may discharge the surety from
liability.
 Creditor’s failure to inform surety of material facts within creditor’s knowledge affecting
debtor’s ability to perform (e.g., that debtor has defaulted several times before).
 General contract defenses. The surety may raise common defenses like incapacity
(infancy), lack of consideration (unless promissory estoppel can be substituted or unless
no separate consideration is necessary because the surety’s and debtor’s obligations arise
at the same time), and creditor’s fraud or duress on surety. However, fraud by the
principal debtor on the surety to induce the suretyship will not release the surety if the
creditor extended credit in good faith; if the creditor knows of the fraud perpetrated by
the debtor on the surety, the surety may avoid liability.
COCLUSION
The surety's liability is indicated by the terms of the contract. Unless otherwise provided, a
surety assumes the obligation of the principal. A surety, however, can limit his liability to a
certain amount since the obligations of the principal and surety do not have to be coextensive.
When a surety agrees to be accountable for a certain amount, she cannot be held responsible for a
sum greater than that for which she contracted. The surety becomes liable when the principal
breaches a contract with the creditor. In the absence of a contractual limitation, a surety's liability
is measured by the loss or damage resulting from the default by the principal. The liability of the
surety terminates when the principal's obligation is fulfilled.
REFERENCE
STATUTES
 Indian Contract act ,1872
 Indian penal code ,1860

BOOKS
 Avtar Singh, Contract and Specific Relief
 Avtar Singh, Contract Law Easy Law Series