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www.lawyerservices.in
 RIGHTS OF SURETY: A LEGAL ANALYSIS

Submitted by-

Divyaraj Jain

SM0121021

Faculty in charge –

Monmi Gohain

NATIONAL LAW UNIVERSITY AND JUDICIAL ACADEMY

GUWAHATI, ASSAM
TABLE OF CONTENTS

❖ Introduction 2
➢ Scope and Objective 2
➢ Research Questions 2
➢ Research Methodology 2
❖ Rights against Principal Debtor 3
➢ i) Right of subrogation 3
➢ ii) Right to indemnity 4
❖ Rights against Creditor 6
➢ i) Right to securities 6
➢ ii) Right to set-off 7
❖ Right against co-sureties 8
➢ i) Right to effect of releasing a surety 8
➢ ii) Right to contribution 8
❖ Conclusion 10
❖ References 10

Introduction
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 nt 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

1
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.

Scope and Objective

The scope of this paper is limited to the rights enjoyed by the surety in a contract of guarantee. The
objective of this project is to understand the rights of surety against creditor, principal debtor and other
sureties.

Research Questions

● What are sureties rights against Principal Debtor?

● What are sureties rights against Creditors?
● What are sureties rights against Co-sureties?

Research Methodology

This paper is produced using doctrinal research methodology. Under primary sources, the Indian
Contracts Act 1872 along with various judgments given by both English and Indian courts were referred
to. Under secondary sources, various articles by reputed publishing houses were referred to.

Rights against Principal Debtor

i) 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

2
 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.1”
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.”2 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.”3 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"4.
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

1
Indian contracts Act, 1872, § 140, Acts of Parliament, 1949 (India).
2
Babu Rao Ramchandra Rao v Babu Manaklal Nehmal, AIR 1938 Nag 413.
3
Liquidator, Manasuba ... vs Commissioner Of Police And Ors (1927) 1 Ch 308.
4
Amritlal Goverdhan Lalan v State Bank ofTravancore, AIR 1968 SC 1432.

3
the case of Mamata Ghose v United Industrial Bank Ltd5. 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."6
In case of Kadamba Sugar Industries (P) Ltd v Devru Ganapathi Hedge Bhairi7, 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.

ii) 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
(a) 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.

5
Mamata Ghose v United Industrial Bank Ltd, AIR 1987 Gal 280, 283.
6
Principles of Equity . (28th Edn by P.V.Baiter and P. St. J. Langan and Snell) 467.
7
Kadamba Sugar Industries (P) Ltd v Devru Ganapathi Hedge Bhairi, AIR 1993 Kant 288.

4
 (b) 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.
(c) 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.8”
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 Kaur9, 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.10

Rights against Creditor

i) 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;

8
Indian contracts Act, 1872, § 145, Acts of Parliament, 1949 (India).
9
Karnail Singh Randhawa v Jagir Kaur, (2008) 66 AIC 539 (P8cH).
10
Chekkera Ponnamma v A.S. Thammayya, AIR 1983 Kant 124.

5
 “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
(a) 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.
(b) 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.” 11
This section is a recognition of the general rule of equity expounded by Lord Eldon in the case of
Craythorne v Swinburne12. 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.13 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

11
Indian contracts Act, 1872, § 141, Acts of Parliament, 1949 (India).
12
Craythorne v Swinburne (1807) 14 Ves Jun 160: 33 ER 482.
13
Wuff & Billing v Jay, (1872) LR 7 QB 756.

6
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.14
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.

ii) 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.

i) 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:

14
Forbes v. Jackson (1882) LR 19 Ch D 615.

7
 “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”15
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.

ii) 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
(a) 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.

(b) 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.”16

“Sec 147. 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.”
Illustrations
“(a) 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

15
Indian contracts Act, 1872, § 138, Acts of Parliament, 1949 (India).
16
Indian contracts Act, 1872, § 146, Acts of Parliament, 1949 (India).

8
 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.”
“(b) 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.”
“(c) 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.17”
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.

17
Indian contracts Act, 1872, § 147, Acts of Parliament, 1949 (India).

9
References

● Indian contracts Act, 1872, Acts of Parliament, 1949 (India).

● Avtar Singh, ‘Contract and Special Relief’, East Book Company( 12th Edition).
● Frederick Pollock, ‘Indian Contracts Act and Specific Relief Act’, Sweet & Maxwell (4th
Edition).
● P.V.Baiter and P. St. J. Langan and Snell, ‘Principles of Equity’, Sweet & Maxwell (24th Edition)

10