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Rights & Liabilities of Surety | Contract of Guarantee | CA Foundation

This video talks about the following topics RIGHTS OF SURETY A. Rights of surety against the creditor Right to benefit of creditor's securities: The surety is entitled to all the securities which the creditor was holding at the time of contract of guarantee. The surety can claim the securities from the creditor on the discharge of full liability of the principal debtor which has been guaranteed by the surety. The surety however is not entitled to the benefit of any security subsequently given. Right of subrogation Where a guaranteed debt has become due on 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. Such a right of surety which the law vests in him is known as right of subrogation. Right to file Quia timet Action The surety has a right at any time after the guaranteed debt has become due and before he is called upon to pay, to require the creditor to sue for and recover the guaranteed debt. This is called the right to quia timet action. However he must undertake to indemnify the creditor for the risk, delay expenses which he may by so doing. Rights in case of fidelity guarantee In the case of fidelity guarantee like guarantee of conduct, honesty etc. of the principal debtor, the surety can call upon the creditors or the employed to dismiss the employee whose honesty he has guaranteed in the event of proved dishonesty of the servant and thus further loss can be avoided. Right to set-off The surety is also entitled to the benefit of any set-off or counter claim, which the primary debtor might posses against the creditor in respect of the same transaction. B. Right against the principal debtor Right of subrogation The surety is subrogated to all rights which the creditor had against the principal debtor. When the surety has paid the guaranteed debt on the default of the principal debtor the surety steps into the shoes of the creditor and will be able to exercise against the principal debtor all these rights and remedies which could be exercised by the creditor Right to indemnity According to Sec. 145, "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 the sum he has rightfully paid under the guarantee, but no some which he has paid wrongfully. The right occurs only on payment of all that the surety is liable under the guarantee. The following two points must also be noted in connection with this right to indemnity (a). The surety cannot claim more than what he has actually paid to the creditor. Thus if he discharges the debt by compromise at less than its full amount, he can get from the principal debtor only the amount actually paid. (b). Actual payment either in cash or by transfer of property is essential for asking the principal debtor to pay. A promissory note given by the surety will not be sufficient to claim indemnity. Right to be relieved from liability The surety can ask the principal debtor to pay off his debts himself and relieve the surety from liability. Thus the surety can ask even before making any payment to the creditor. However he can do so only after the debt has become due. C. Rights against co-sureties Co-sureties: When a debt is guaranteed by two or more sureties, they are called co-sureties. In such a case all the co-sureties are liable towards the payment of the guaranteed debt as per the agreement among them. Right to contribution According to Sec. 146, "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, all 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. Bound in different sums According to Sec. 147, "Co-sureties who are bound in different sums are liable to pay Learning with Nirmal is the place where you will learn something new about commerce, Accountancy, Finance, Business Law, etc.