Page 44 - DMGT407Corporate and Business Laws

Unit 2: Consent, Indemnity and Guarantee Acts

effect that the surety’s remedy to recover the money in case the principal debtor Notes
defaults, may be impaired. However, there are certain exceptions. These are:
(i) 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.

Example: C, the holder of an overdue bill of exchange, drawn by A as surety for B and
accepted by B, contracts with M to give time to B. A is not discharged.
(ii) Mere forbearance on the part of creditor to sue the principal debtor, or to
enforce any other remedy against him, does not, in the absence of a provision
to the contrary, discharge the surety (s.137).

Example: B owes C (a banker) a debt guaranteed by A and the debt becomes payable, but
C does not sue B for a year after debt becomes payable. A is not discharged from his suretyship.
(iii) If the creditor releases one of the co-sureties, the other co-surety (or co-sureties)
thereby is not discharged. The co-surety released by the creditor is also not
released from his liability to the other sureties (s.138).
(d) Not to do any act inconsistent with the rights of the surety. (s.139). Where C lends money
to B on the security of a joint and several promissory note made in C’s favour by B
and by A as surety for B, together with a bill of sale of B’s furniture, which give
power to C to sell the furniture and apply the proceeds in discharge of the note.
Subsequently, C sells the furniture, but owing to his misconduct and willful
negligence, only a small price is realized, then A is discharged from liability on the
note.

2.7.6 Rights, Liabilities and Discharge of Surety

1. Rights of Surety: Rights of a surety may be classified under three heads: (i) rights against
the creditor, (ii) rights against the principal debtor and (iii) rights against co-sureties.

(a) Rights against the Creditor: In case of fidelity guarantee, the surety can direct creditor
to dismiss the employee whose honesty he has guaranteed, in the event of proved
dishonesty of the employee. The creditor’s failure to do so will exonerate the surety
from his liability.
(b) Rights against the Principal Debtor

(i) Right of subrogation: Section 140 lays down that where a surety has paid the
guaranteed debt on its becoming due or has performed the guaranteed duty
on the default of the principal debtor, he is invested with all the rights which
the creditor has against the debtor. In other words, the surety is subrogated to
all the rights which the creditor had against the principal debtor. So, if the
creditor loses, or without the consent of the surety parts with any securities
(whether known to the surety or not) the surety is discharged to the extent of
the value of such securities (s.141). Further, the creditor must hand over to the
surety, the securities in the same condition as they formerly stood in his
hands.
(ii) Right to be indemnified: The surety has a right to recover from the principal
debtor the amounts which he has rightfully paid under the contract of guarantee.

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