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Rights of Surety

The surety in the contract of guarantee plays an important role as the whole contract lies on the surety given by him. The creditor is in a position where he enjoys the benefit of double safety not where in he is entitled to be paid off his credit firstly by the principal debtor then in lapse of that he is blacked the guarantee given by the surety.

This puts the creditor in a more safe and stable position in context of receiving the payment. The surety, who might or might not directly benefit from the original contract between the principal debtor and the creditor, has a ubiquitous liability to pay off the principal debtors dues. This nature of contract has resulted in certain legal rights that the surety is entitled to enjoy while in a contract of surety. These rights are against the creditor, principal debtor and even other co-sureties. This project discusses different kinds of rights that the surety enjoys.

Rights against Principal Debtor

  1. Right of subrogation
    A surety enjoys two types of rights against the Principal Debtor and they are covered under the sections 140&145. Firstly, section 140 mentions right to subrogation. It reads as follows:
    Sec 140. Rights of surety on payment or performance:
    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."

    When the surety makes the payment for all the dues which he owed towards the creditor on behalf of the principal debtor he is entrusted with the rights which are enjoyed by the creditor as against the principal debtor. The surety then takes on all the rights that the creditor has against the principal debtor and stands in lieu of the creditor.

    In the case of Babu Rao Ramchandra Rao v Babu Manaklal Nehmal, it was held that:
    "If the liability of the surety is coextensive with that of the principal debtor, his right is not less coextensive with that of the creditor after he satisfies the creditor's debt." This right extends to the power of surety being able to sue the principal debtor to make indemnify him similar to that of creditor. This was dealt in the case of Official Liquidator, Manasuba ... vs Commissioner Of Police And Ors.

    Wherein a director of a liquidating company had paid off the rent owed by the company in his personal capacity before the date of liquidation. It was held that "he was entitled to stand in the place of the creditor, and to use all remedies^ if need be, in the name of the creditor in any action to obtain indemnification from the principal debtor for the loss sustained."

    The supreme court has held that the surety is entitled to all the remedies that the creditor has against the principal debtor along with any security held by the creditor against the principal debtor. He is entitled to sell these securities if such need arises in order to be indemnified. Surety's rights are not just drawn by the contract itself but by the principle of natural justice as well, therefore such rights need not be stipulated in the contrast itself but are inherent in nature.

    The Supreme court in the case of Amritlal Goverdhan Lalan v State Bank ofTravancore, observed that the language of the section 140 "is invested with all the rights which the creditor had against the principal debtor" makes is very evident that "without the necessity of a transfer, the law vests those rights in the surety".

    Transfer of any security, within the possession of creditor, to surety doesn't entitle the surety to substitute his payment of principal debt to direct sale of security by the creditor himself, as it beats the purpose of the contract of guarantee. The surety cannot restrict the remedies of the creditor against the surety.Which means that the surety can not ask the creditor to sell off the securities in place of making him a direct payment. Not even in case of an insolvent principal debtor can the surety ask the creditor to sell off securities as the principal debtor will in high probability not be able to indemnify the surety.

    Right of subrogation not only comes in power after the payment by the surety but certain parts of it can be enforced even before the payment. This kind of situation was discussed by the Calcutta High court in the case of Mamata Ghose v United Industrial Bank Ltd.

    In this case the surety discovered that when the debt became due, the principal debtor was selling his personal belongings one by one out of fear that the surety may take them after paying. As a result, the surety requested a temporary injunction to stop the principal debtor from doing this. The court provided the same while quoting a paragraph from 'Snell's Principles of Equity'

    "It has been stated there that the surety has an equitable right to compel the principal debtor to pay the debt and so relieve the surety from the necessity of paying it out of his pocket. It is in the nature of quia timet, and is based on the principle that it is unreasonable that a man should always have a cloud hang over him, so that he ought to be entitled to remove it. It is, therefore, immaterial that the creditor has refused to sue or that he has made no demand.

    A fortiori, the action lies where the principal debtor threatens to commit a breach of the obligations which the surety has guaranteed and an order may be made even though the principal debtor is without funds. But an action will not lie where the debt is not an actual, accrued or definite debt or, if on its true construction, the guarantee precludes action before the creditor demands payment."

    In case of Kadamba Sugar Industries (P) Ltd v Devru Ganapathi Hedge Bhairi, liability to pay arises for the principal debtor and the sureties therefore the creditor begins legal proceedings against the same and the sureties make the payment after the preliminary decree. The Apex court held that in such a situation the pending case can be assigned to the sureties by the virtue of subrogation.
     
  2. Right to indemnity
    Section 145 of the Indian Contracts Act talks about the right to indemnity. It reads as follows:

    Sec 145. Implied promise to indemnify surety:
    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.
Illustrations
  1. B is indebted to C, and A is surety for the debt. C demands payment from A, and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt.
     
  2. C lends B a sum of money, and A, at the request of B,accepts a bill of exchange drawn by e upon Ato secure the amount. C,the holder of the bill,demands payment of it from A, and, on A's refusal to pay, sues him upon the bill./A, not having reasonable grounds for doing so, defends the suit, and has to pay the amount of the bill and costs. He can recover from B the amount of the bill, but not the sum paid for costs, as there was no real ground for defending the action.
     
  3. A guarantees to C,to the extent of 2000 rupees, payment for rice to be supplied by C to B. C supplies to B rice to a less amount than 2000 rupees, but obtains from A payment of the sum of 2000 rupees in respect of the rice supplied. A cannot recover from Bmore than the price of the rice actually supplied.
Every contract of guarantee has an implied contract of indemnity between the principal debtor and the surety. Wherein the surety is entitled to be indemnified by the principal debtor for any contractual liability paid off by him. In case of Karnail Singh Randhawa v Jagir Kaur, it was further held that the surety is even entitled to interest payment on the amount owed to him.

The right of indemnity can only be enforced for the rightful payment made to the creditor. An example of non rightful payment can be seen in the case of Chekkera Ponnamma v A.S. Thammayya. In this case the principal debtor had bought 4 motor vehicle and he died before making the full payment and the same liability was then enforced against the surety. The surety paid off the creditors.

The surety then brought legal action against the principal debtor's legal representatives. The surety was ordered by the court to demonstrate how much money was made from the sale of the automobiles, which he was unable to do. As a result, it was decided that the surety's payment was improper. Therefore the surety was denied the right to be indemnified.

Rights against Creditor

  1. Right to securities
    Section 141 of the Indian contracts act covers the surety's right to securities held by the creditor. It is given as;

    Sec 141. Surety's right to benefit of creditors securities:
    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 is 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 surety, parts, with such security, the surety is discharged to the extent of the value of the security.

    Illustrations
    C advances to B, his tenant, 2000 rupees on the guarantee of A. C has also a further security for the 2000 rupees by a mortgage of B's furniture. C cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.

    C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes B's goods in execution under the decree, and then, without the knowledge of A, withdraws the execution.A is discharged.

    (c) A, as surety for B makes a bond jointly with B To C,to secure a loan from Cto B.After wards, C obtains from B a further security for the same debt. Subsequently C gives up the further security. A is not discharged."

    This section is a recognition of the general rule of equity expounded by Lord Eldon in the case of Craythorne v Swinburne. The surety is entitled to all the rights that the creditor enjoyed against the principal debtor before the payment of the dues. This even includes the securities held by the creditor. It is not necessary that the surety is aware of such security held by the creditor, his right over them exists nonetheless.

    This right is complemented by the duty of the creditor to ensure safeguard of the securities held by him. In the case of Wuff & Billing v Jay, the court made further observations in regards to surety's right over the securities. The plaintiff has given loan to A and B in exchange was given lease of their business premises and plant, fixtures and things thereon. Later the creditor came to know that the debtors have become insolvent but still allowed them to utilise the leased premises.

    The court held that the plaintiffs, by their omission to seize the property assigned on default, had deprived themselves of the power to assign the security to the surety. Surety was, therefore, discharged to the amount that the goods were worth. The right still continues when the given security is burdened with further advances by the creditor. The same was withheld in the case of Forbes v. Jackson. In this case the creditor had given a loan of £200 to the principal debtor against the leasehold premise and his insurance policy as securities. Further the creditor had advanced more money against the same security.

    This was not in knowledge of the surety. At time of default by the principal the surety has paid off the £200 amount for which he was the surety. When the surety demanded for the securities held by the creditor he was denied the same and was asked to paid the later advanced amount to the principal. The court held that the further advance given by the creditor doesn't impact the surety's right over the initial security.

    When does the right over the securities accrue for the surety? Simply when the surety pays of the amount that he had become surety for. This is simple when the surety is for the whole of the debt but things become complicated when the surety is given only for a certain portion of the debt. Does payment made by the surety for only his half of the whole debt entitle him to the right over security? Both Indian and English courts have dealt with similar issues.

    The English courts have held that the creditor's right over the securities is primary as against the surety's right over the same securities. Whereas Indian courts have held the opposite view and the right or surety lies above the right over creditor's. Therefore the surety is entitled to the securities even if the surety paid by him amounts to only a portion of the whole debt given to the principal debtor.
     
  2. Right to set-off
    The surety is entitled to the right to set-off. In a situation where the creditor sues the surety for the given guarantee, the surety can claim for set-off against any due by the creditor against the principal debtor. It means that the surety has a right to deduction in the amount of his guarantee to the extent of any dues of the creditor towards the principal debtor in any different contract or agreement.


Right against co-sureties

The rights of surety are not limited to just creditor and the principal debtor, with whom he is in direct dealing with, but also against the co-sureties with whom he may not be directly connected with the contract of guarantee. These rights are covered under sections 138, 146 and 147.
  1. Right to effect of releasing a surety
    This right deals with the effect on the status of the surety incase of a co-surety being freed of his guarantee. This is covered under section 138 which reads as follows:

    Sec 138. Release of one co-surety does not discharge others
    Where there are co-sureties, a release by the creditor of one of them does not discharge the others; neither does it free the surety so released from his responsibility to the other sureties

    This means that the creditor has the authority to discharge at his will any co-surety from his guarantee. This does not mean that all the other remaining sureties are also discharged and their liability still continues. However the discharge by the creditor does not discharge the same surety from his liability owed to the co-sureties.
     
  2. Right to contribution
    This right empowers a surety to enforce payment for the owed liability by the specific co-surety. This right is given under sections 146-147 which reads as follows:

    Sec 146. 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 debtor1.

Illustrations:
  1. A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in payment. A, B and C are liable, as between themselves, to pay 1,000 rupees each.
     
  2. 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 one-half. E makes default in payment. As between the sureties, A is liable to pay 250 rupees, B 250 rupees, and C 500 rupees.
Sec 147. Liability of co-sureties bound in different sums.óCo-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.

Illustrations:

  1. A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of each 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 each liable to pay 10,000 rupees.
     
  2. 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 40,000 rupees. A is liable to pay 10,000 rupees, and B and C 15,000 rupees each.
     
  3. 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 70,000 rupees. A, B and C have to pay each the full penalty of his bond.
     
In a contract of guarantee the co-sureties are bound to make a contribution of an equal amount in case any liability arises due to non-payment of the principal debtor. It is not necessary that all co-sureties are part of a similar contract or jointly liable. If a particular surety makes payment in excess of his share of liability he is entitled to be reimbursed by the other sureties.

Even in case the sureties are not equally liable, a surety who has paid beyond his specific share of the whole liability is to be reimbursed. For example in a contract of guarantee there are three sureties A,B and C for any default made by D. All three A, B and C have a limited level of guarantee at 300, 500 and 900 respectively. Therefore in an event default by D amounting to 900, all three sureties are liable to pay 300 each.

In a case of default amounting to 1200, A would at maximum be liable to pay 300 and 450 by the remaining two. No surety can be asked to pay an amount more than the limit of guarantee given by him. This right cannot be exhausted due to the mere fact that the creditor did not demand the liability to be paid off, even if the contract specifically makes it a requirement. The whole act of demand by the creditor is merely procedural and evidentiary. It is for the benefit of the surety himself and can be waived by him at his wish.

Conclusion
In a contract of guarantee, a surety's is seen to have just liability to pay off debts of the principal debtor in case of default. However the surety has more than just liability, he even enjoys certain rights. These rights are different in nature with different parties of the contract. They are against all the parties of a contract like principal debtor and creditor.

A surety even enjoys certain rights against the co-sureties and it is not necessary that the co-sureties are there in the same contract. These rights ensure that the surety is indemnified against the surety paid by him, this can be done by either payment by the principal debtor or give the surety rights over the securities held by the creditor against the principal debtor.

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