Right of Surety Against Creditor under the Indian Contract Act, 1872

The role of a surety is pivotal, serving as a guarantor for the principal debtor’s liabilities. The Indian Contract Act, 1872, extensively covers the rights and obligations of sureties in a contract of guarantee. Specifically, the rights of a surety against the creditor are crucial to ensuring the fair treatment and protection of the surety.

What is the Role of a Surety?

A surety is a person who guarantees the performance of a contract or the payment of a debt by the principal debtor. The surety’s obligation is secondary and contingent upon the default of the principal debtor. In a contract of guarantee, there are three parties involved: the principal debtor, the creditor and the surety.

The surety undertakes to fulfil the obligation if the principal debtor fails to do so. Given the significant risk assumed by the surety, the law provides certain protections and rights against the creditor to balance this risk.

Right to Securities Held by the Creditor

One of the rights of a surety against the creditor is the right to securities. This right is enshrined in Section 141 of the Indian Contract Act, 1872, which states:

“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.”

This provision ensures that the surety can claim the benefit of any security held by the creditor against the principal debtor. The rationale behind this right is to protect the surety from bearing an undue burden if the creditor has sufficient security to cover the debt. The surety’s right to securities operates irrespective of the surety’s knowledge about the existence of such securities at the time of entering into the contract of guarantee.

Legal Implications of Section 141

The legal implications of Section 141 are manifold, providing a robust framework to safeguard the interests of the surety. Let’s explore the key aspects:

1. Entitlement to Security: The surety is entitled to the benefit of all securities held by the creditor against the principal debtor. This entitlement exists regardless of the surety’s awareness of such securities. The law assumes that the presence of securities should reduce the surety’s risk.
2. Loss or Release of Security: If the creditor loses or parts with the security without the surety’s consent, the surety is discharged to the extent of the value of the security. This provision ensures that the creditor cannot unilaterally diminish the security available to the surety, thereby increasing the surety’s risk.
3. Extent of Discharge: The discharge of the surety is proportional to the value of the security lost or released. This means that the surety’s liability is reduced by the amount that the security could have covered.

Illustrative Examples on Right of Surety Against Creditor

To understand the practical application of Section 141, consider the following examples:

Example 1: Cancellation of Mortgage

• Scenario: C advances Rs. 2,000 to B, his tenant, with A as the surety. C also holds a mortgage on B’s furniture as additional security. If C cancels the mortgage and B becomes insolvent, C sues A on the guarantee.
• Outcome: A is discharged from liability to the extent of the value of the furniture. The cancellation of the mortgage by C without A’s consent reduces A’s liability because the security (furniture) that could have been used to satisfy the debt is no longer available.

Example 2: Withdrawal of Execution

• Scenario: C, a creditor whose advance to B is secured by a decree, receives a guarantee from A. C then takes B’s goods in execution under the decree but later withdraws the execution without A’s knowledge.
• Outcome: A is discharged. By withdrawing the execution, C has diminished the security available to satisfy the debt, thereby discharging A to the extent of the value of the goods that were taken in execution.

Example 3: Further Security Given Up

• Scenario: A, as surety for B, makes a bond jointly with B to C to secure a loan. Later, C obtains further security from B for the same debt but subsequently gives up this further security.
• Outcome: A is not discharged. The discharge applies only to securities held at the time of entering into the contract of guarantee, not to those acquired subsequently.

Judicial Interpretation

Indian courts have consistently upheld the rights of sureties under Section 141, reinforcing the principle that a surety should not suffer due to the creditor’s actions that impair the value of the security. Judicial pronouncements have clarified that the surety’s discharge is contingent upon the creditor’s act of losing or parting with the security without the surety’s consent.

Conclusion

Under the Indian Contract Act, 1872, the key right of a surety against the creditor is stipulated in Section 141. This section entitles the surety to benefit from every security the creditor holds against the principal debtor at the time of entering into the contract of suretyship, regardless of the surety’s knowledge of such security.

If the creditor loses or parts with the security without the surety’s consent, the surety is discharged to the extent of the value of the security. This protection ensures that the surety’s liability is proportionally reduced if the security available to cover the debt is diminished through the creditor’s actions.