Abstract
Section 140 of The Indian Contract Act,1872 lays down the rights of the surety on payment or execution and Section 141 lays down the surety’s right to benefit from the creditor’s securities[1]. Section 140 specifically states that the surety is eligible to the securities of the creditor “upon payment or performance of all that he is liable for” only to the extent that the principal debtor has defaulted[2]. Section 141 on the other hand does not lay down the condition of payment or performance but states that “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 was entered into” and the discharge is limited to the amount of the security[3]. There is an evident distinction in the phrasing of the two sections. The Indian Contract Act does not indicate when the surety has the right to have the creditor’s securities transferred over to him. Whether it is when the creditor’s debt is paid in full or the surety pays the total amount of guarantee. This topic is of sufficient interest to the legal community because it highlights a major lacuna in the Indian Contract Act, 1872, due to which there have been several contradicting judements by different High Courts. Referring to Pollock and Mulla’s arguments and the 13th Law Commission Report’s suggestions, this article examines whether the surety should be entitled to creditor’s securities delivered over to him only after the creditor is entirely paid off. It also raises the question of whether Indian law should be aligned with English law and so made uniform for everybody throughout so that it is easier to ascertain when the surety’s right to creditor’s securities accrues. The 13th Law Commission Report, in agreement with the arguments made by Pollock and Mulla, has already suggested that the relevant section be amended and brought in line with the English Law[4] and this paper will aim to analyse these arguments and attempt to figure if this decision is valid.
The Different Opinions of High Courts-
The language of Sections 140 and 141[5] can be applied to basic circumstances in which the creditor and surety share the identical obligation and the surety is subrogated to all of the creditor’s debt-related securities. However, this can be perplexing in circumstances where a surety has guaranteed a specific portion of a debt for which the creditor has a common claim. It is not stated when the surety has the right to have the creditor’s securities turned over to him. When the creditor’s debt is paid off, or when the surety pays the whole sum of his guarantee.[6] These questions are by no means easy to answer on the basis of the language of Sections 140 and 141 of The Indian Contract Act, 1872 but several High courts have attempted to answer it differently. In the case Goverdhandas Goculdas Tejpal v. The Bank of Bengal[7], the Bombay High Court considered this question wherein an aliquot or had a defined fraction of a prior debt protected by mortgage guaranteed by a surety. He claimed that he was entitled to a share of the mortgage based on the amount of the debt that he had guaranteed and paid before the mortgagee was paid the entire amount of his mortgage debt upon payment of the portion of the debt that he had guaranteed and paid.[8] The claim was refused because the surety’s right against the securities arises only after the creditor’s claim is satisfied. The point made there was that the surety is not eligible for the transfer of the security unless he pays down the complete amount. The court considered the English authorities and following them, held that, since the principal debtor owes the surety an obligation to indemnify him, a surety who has paid the debt for which he has guaranteed has a right to the securities held by the creditors. The creditor and the surety have an agreement that the creditor will not do anything to take away the surety’s right. However, the creditor’s right to keep his securities is more significant than the surety’s claim on them, which emerges only after the creditor’s claim has been satisfied. Farran J. expressed that it is odd that a creditor who is not entirely protected by a mortgage and who secures the benefit of a surety for a percentage of his mortgage debt in an attempt to further safeguard himself is bereft of a portion of the security. The insufficiency of which was the main cause for requesting the surety because of the surety’s demand to claim the benefit of half the mortgage security on reimbursing his half of the debt[9].
This question was reconsidered by the Madras High Court, in the case of Parvateneni Bhushayya v Pothuri Suryanarayana[10]. Even though the Madras High Court disagreed with Farran J’s viewpoint, it did not attempt to address his argument regarding the equities mentioned above and overturned his judgment. Although the creditor had not yet been fully compensated, the Court determined that the surety was authorized to a proportionate share of the security held by the creditor at the time the guarantor discharged his liability, as opposed to a subsequent successor of the creditor. This perspective of the court, however, is erroneous since it elevates the surety’s status above that of the creditor’s by giving him rights to securities that should ideally belong to the creditor until he is fully paid off.
When should the surety be entitled to the creditor’s securities?
The surety should certainly be entitled to the creditor’s securities only on the payment or performance of the debt. Complications ensue, however, when the surety has only guaranteed a portion of the debt and even if he has paid everything he was due for, and the creditor’s claim against the principal debtor has not yet been entirely satisfied[11]. In such circumstances, where the liability of the creditor has been greater than that of the surety, the security should also be accorded to him and the surety must withhold its right to the securities until the creditor is fully paid off. It is only justified for the security to be transferred to the surety when the creditor has been entirely reimbursed with the payment. It would be unfair to the creditor if the surety, who is only responsible for a certain part of the debt be entitled to the same securities as the creditor who is responsible for the whole debt. It is, therefore plausible to deduce from the language of Sections 140 and 141 of The Indian Contract Act, 1872[12], that the right to subrogation of the surety is dependent on the nature of the contract and the extent of the surety’s liabilities. Applying these sections universally would just make for an inequitable generalization. If the value of the security given to the creditor is equal to the liability undertaken by the surety or the liability of the surety extends to the whole debt, then the surety will be subrogated to the securities of the creditor right after he has paid for all that he has liable for. However, if the extent of the liability of the surety does not extend to the entire amount of the payment but only to a certain portion of it, then he must not be given the right to the securities until the creditor is wholly paid off. Moreover, the language of the section suggests that the surety should be entitled to the creditor’s securities only on the payment of the entire debt and not just a certain portion of it.
Another objection to allowing transfer of securities to the surety before the whole payment if the creditor lies in the fact that the security is for the surety’s indemnification in case he is denied of his payment by the principal debtor and he should have no right to it until he is denied that payment because the creditor is not yet secure against the primary debtor’s refusal to pay[13]. In doing the opposite of this, none of the main aims are fulfilled, and the only outcome is that the creditor is placed in an unfavourable position in which he has no claim to the securities even before being fully paid off. In a contract of guarantee, there are three contracts, the first one is between the creditor and the principal debtor, the second one is between the creditor and the surety, and the third one is between the principal debtor and the surety. This is also the logical order of the contracts in which they must be performed and the terms of the first contract must be fulfilled first before the other two. Thus, it is only reasonable that the creditor, being a party to the primary contract must be paid off first before the surety is subrogated with his rights to the securities.
Conclusion-
It is inequitable for the creditor to be forced to share the securities with the surety if he had paid the full market value. Furthermore, the guarantor’s claim to securities is based on the principal debtor’s obligation to indemnify the surety. It would be odd if the surety could utilise these powers to thwart the creditor’s efforts to collect his obligation[14]. The creditor’s right to withhold securities until the entire obligation is paid, it is argued, supersedes any claim of the surety, whether based on section 140 or section 141. The pledge is issued as a security for the entire loan, and the debtor has no recourse to the proportionate release of the securities as per the loan repayment. Thus, in accordance with the arguments made above, it can be concluded that only if the debt or liability owed by the principle-debtor to the creditor has been fully paid or discharged is the surety entitled to the benefits of every security held by the creditor against the principal debtor.
[1] The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872 (India).
[2] The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872, S.140 (India).
[3] The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872, S.141 (India).
[4] Law Commission of India, Thirteenth Report (Contract Act, 1872)1, 41 (September 26, 1958), https://lawcommissionofindia.nic.in/1-50/Report13.pdf
[5] Supra note 1.
[6] 2 Sir Frederick Pollock & Sir Dinshah Fardunji Mulla, Pollock & Mulla: The Indian Contract And Specific Relief Acts s141.9 (16d ed., 1872).
[7] Goverdhandas Goculdas Tejpal v. Bank of Bengal (1891-92), ILR 15 Bom 48.
[8] Supra note 2 at 55.
[9] Supra note 3.
[10] Parvateneni Bhushayya v Pothuri Suryanarayana (1944), AIR 1944 Mad 195.
[11] Avtar Singh, Law of Contract and Specific Relief 665, (12d ed, 2021).
[12] Supra note 1.
[13] William Williams, A Creditor’s Right to His Surety’s Securities. Harv. L. Rev. 1, 326, 329 (1888). https://www.jstor.org/stable/pdf/1321998.pdf?refreqid=excelsior%3A5f1878ae0eb1e986937d92abd4106836
[14] Supra note 4.
