No Mandate Of Indian Contract Act That Finally Debt Is To Be Recovered From Guarantor

No Mandate Of Indian Contract Act That Finally Debt Is To Be Recovered From Guarantor

1. CONTRACT OF GUARANTEE - SCHEME OF CONTRACT ACT, 1872:

Sections 133, 134, 135, 139, 140 and 141 of the Indian Contract Act, 1872 provide as follows.

133. DISCHARGE OF SURETY BY VARIANCE IN TERMS OF CONTRACT.—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 transactions subsequent to the variance.

134. DISCHARGE OF SURETY BY RELEASE OR DISCHARGE OF PRINCIPAL DEBTOR.—The surety is discharged by any contract between the creditor and the 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.

135. DISCHARGE OF SURETY WHEN CREDITOR COMPOUNDS WITH, GIVES TIME TO, OR AGREES NOT TO SUE, PRINCIPAL DEBTOR.—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 sue, the principal debtor, discharges the surety, unless the surety assents to such contract.

139. DISCHARGE OF SURETY BY CREDITOR’S ACT OR OMISSION IMPAIRING SURETY’S EVENTUAL REMEDY.—If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.

140. RIGHTS OF SURETY ON PAYMENT OR PERFORMANCE.—Where a guaranteed debt has become due, or 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.

141. SURETY’S RIGHT TO BENEFIT OF CREDITOR’S SECURITIES.—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.

145. IMPLIED PROMISE TO INDEMNIFY SURETY.—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 sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully.

2. CERTAINLY, THERE IS NO MANDATE OF INDIAN CONTRACT ACT THAT FINALLY THE DEBT IS TO BE RECOVERED FROM THE GUARANTOR

The scheme of Indian Contract Act on the subject of a Contract of Guarantee may be summarized as follows:

(a) A contract of guarantee is a tripartite agreement which contemplates the principal debtor, the creditor and the surety {Punjab National Bank v. Sri Vikram Cotton Mills, (1970) 1 SCC 60; AIR 1970 SC 1973; (1970) 2 SCR 462; 40 Comp Cas 927}. The purpose of a guarantee being to secure the repayment of a debt, the existence of a recoverable debt is necessary. It is of the essence of a guarantee that there should be someone liable as a principal debtor and the surety undertakes to be liable on his default. If there is no principal debt, there can be no valid guarantee. This was so held by the House of Lords in the Scottish case of Swan v. Bank of Scotland {(1836) 10 Bligh NS 627} decided as early as 1836.

(b) RIGHTS OF SURETY ON PAYMENT OR PERFORMANCE. —Where a guaranteed debt has become due, or 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 (section 140). 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 (section 141).

(c) IMPLIED PROMISE TO INDEMNIFY SURETY.—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 sum he has rightfully paid under the guarantee (section 145).

(d) In essence, ultimately the debt is to be recovered from the principal debtor, either primarily by the creditor or finally by the surety. Certainly, there is no mandate of Contract Act that finally the principal debt is to be recovered from the surety.

Narendra has around 26 years of rich experience in the domain of Companies Act, Arbitration and Conciliation Act, Consumer Protection Act, Sica, 1985, Recovery of Debts Due to Banks and Financial Institutions Act, 1993, Securitization Act, 2002 etc.