Page 43 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes (b) A guarantees payment to B, a tea-dealer, to the amount of ` 10,000 for any tea he may
from time to time supply to C. B supplies C with tea of the value above ` 10,000 and
C pays B for it. Afterwards B supplies C with tea to the value of ` 15,000. C fails to
pay. The guarantee given by A was a continuing guarantee and he is accordingly
liable to B to the extent of ` 10,000.

2.7.5 Rights and Obligations of the Creditor

1. Rights of a Creditor:
(a) 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.

(b) Where surety is insolvent, the creditor is entitled to proceed in the surety’s insolvency
and claim the pro rata dividend.
2. Obligations Imposed on a Creditor in a Contract of Guarantee:

(a) 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.
(b) 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 suretyship.

(c) 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

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