What are the rights of surety against creditors? Discuss the relevant provisions of the Indian Contract Act.

Question: What are the rights of surety against creditors? Discuss the relevant provisions of the Indian Contract Act. [HJS 2011]

Find the answer to the mains question of the Law of Contract only on Legal Bites. [What are the rights of surety against creditors? Discuss the relevant provisions of the Indian Contract Act.]

Answer

In India, the rights of a surety against creditors are governed by the Indian Contract Act, 1872. The Act provides certain provisions that protect the interests of a surety and outline the rights and obligations they possess. Let's discuss these relevant provisions:

Right of Subrogation (Section 140):

According to this provision, when a surety pays off the debt on behalf of the principal debtor, they are entitled to all the rights and remedies that the creditor had against the principal debtor. This means that the surety steps into the shoes of the creditor and can recover the amount paid from the principal debtor or avail themselves of any security held by the creditor.

In the case of Babu Rao Ramchandra Rao v. Babu Manaklal Nehmal, AIR 1938 Nag 413, the court said,

"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."

Right of Indemnity (Section 145):

The surety has the right to demand indemnity from the principal debtor against all liabilities, costs, and expenses incurred by the surety in fulfilling their obligations under the contract of guarantee. This means that the surety can seek reimbursement from the principal debtor for any losses suffered or expenses incurred.

Illustration: 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 B more than the price of the rice actually supplied.

Right of Set-off (Section 141):

If the principal debtor has any claim against the creditor, the surety is entitled to use that claim to the extent of the surety's liability. The surety can set off the amount due from the principal debtor against the amount payable by the surety to the creditor. This right prevents the creditor from recovering more than the actual amount due.

Right to be Discharged (Section 133):

The surety has the right to be discharged from the contract of guarantee under certain circumstances. These include any material variation made to the terms of the contract between the creditor and the principal debtor without the consent of the surety, or any act or omission by the creditor that may impair the surety's eventual rights.

Right to Security (Section 141):

If the principal debtor provides any security to the creditor, whether movable or immovable, the surety has the right to demand the same security from the creditor. This ensures that the surety has a similar level of protection as the creditor in case of default by the principal debtor.