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Mercantile Laws-I

Notes 7.3 Right and Obligations of Creditors

7.3.1 Rights of a Creditor

Rights of creditors are as follows:

1. The creditor is entitled to demand payment from the surety as soon as the principal debtor
refuses to pay or makes default in payment. The liability of the surety cannot be postponed
till all other remedies against the principal debtor have been exhausted. In other words,
the creditor cannot be asked to exhaust all other remedies against principal debtor before
proceeding against surety. The creditor also has a right of general lien on the securities of
the surety in his possession. This right, however, arises only when the principal debtor has
made default and not before that.

2. Where surety is insolvent, the creditor is entitled to proceed in the surety’s insolvency and
claim the pro rata dividend.

7.3.2 Obligations Imposed on a Creditor in a Contract of Guarantee

Obligations imposed on a creditor in a contract of guarantee are as follow:
1. Not to change any terms of the original contract: The creditor should not change any terms
of the original contract without seeking the consent of the surety. Section 133 provides.
“any variance made, without the surety’s consent, in the terms of the contract between the
principal debtor and the creditor, discharges the surety as to the transactions subsequent
to the variance”.

Example: A banker contracts to lend X ` 5,000 on March 4. A guarantees repayment. The
banker pays X ` 5,000 on January 1. A in this case is discharged from his liability as the contract
has been varied as much as the banker might sue X before March 4, but it cannot sue A as the
guarantee is from March 4.
2. Not to release or discharge the principal debtor: The creditor is under an obligation not
to release or discharge the principal debtor. Section 134 states: “The surety is discharged
by a contract between the creditor and principal debtor, by which the principal debtor is
released, or by any act or omission of the creditor, the legal consequence of which is the
discharge of the principal debtor”.

Example: A gives a guarantee to banker C for repayment of the debt granted to B. B later
contracts with his creditors (including C, the banker) to assign to them his property in consideration
of their releasing him from their demands. Here B is released from his debt by the contract with
C and A is discharged from his surety ship.
3. Not to compound, or give time to, or agree not to sue the principal debtor: Section 135
provides, “A contract between the creditor and the principal debtor, by which the creditor
makes a composition with or promises to give time to, or not to use the principal debtor,
discharges the surety, unless the surety assents to such contract”.
If the time for repayment is extended, the debtor may die or become insane or insolvent
or his financial position may become weaker in the meanwhile, with one effect that

the surety’s remedy to recover the money in case the principal debtor defaults, may be
impaired. However, there are certain exceptions. These are:
(a) Section 136 states that if the creditor makes an agreement with a third party, but not
with the principal debtor, to give extension of time to the principal debtor, surety is
not discharged even if his consent has not been sought.

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