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.
Illustrations
(a) C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.
(b) C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes B’s goods in execution under the decree, and then, without the knowledge of A, withdraws the execution. A is discharged.
(c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up the further security. A is not discharged.
Right of Surety over Creditor’s Security
A surety (the person who gives guarantee) has the right to use any security (like property, goods, etc.) that the creditor has from the main borrower (principal debtor) at the time of giving the guarantee. It does not matter whether the surety knows about that security or not. If the creditor loses that security or gives it up without asking the surety, then the surety’s responsibility is reduced by the value of that security.
Examples
(a) C gives ₹2,000 loan to B (tenant), and A gives guarantee. C also keeps B’s furniture as security (mortgage). Later, C cancels the furniture security. B cannot repay (becomes insolvent), so C asks A to pay. A will not pay full amount. A’s liability is reduced by the value of the furniture.
(b) C gives loan to B and has a court order (decree) as security. A gives guarantee. C takes B’s goods using court order, but later returns the goods without telling A. A is fully released from liability.
(c) A gives guarantee for B’s loan and signs bond with B to C. Later, C takes extra security from B for the same loan. Then C gives up that extra security. A is still liable (not discharged), because that extra security was not there at the beginning.
(d) C gives ₹50,000 loan to B. A gives guarantee. C keeps B’s gold chain as security. C keeps the gold carelessly and it gets stolen. A’s liability will be reduced by the value of the gold chain. Because creditor failed to protect the security.
(e) C gives loan to B. A is surety. C has B’s bike as security. Without informing A, C sells the bike for a low price. A’s liability will be reduced by the actual value of the bike, not the low sale price.
(f) C gives ₹1,00,000 loan to B. A is surety. C keeps B’s land papers as security. Later, C gives back the land papers to B without asking A. A’s liability will be reduced based on value of the land.
(g) C gives loan to B. A gives guarantee. C has B’s fixed deposit (FD) as security, but A doesn’t know. Later, C withdraws and spends that FD. A still gets benefit. A’s liability is reduced by FD amount, even though A didn’t know about it.
(h) C gives loan to B. A gives guarantee. At that time, there is no security. Later, C takes B’s laptop as security and then loses it. A is not discharged. Because security was not there when guarantee was given.
(i) C gives ₹80,000 loan to B. A is surety. C has goods worth ₹30,000 as security. C loses goods worth ₹10,000 only. A’s liability will be reduced by ₹10,000 only, not full ₹30,000.
(j) C gives loan to B. A is surety. C has:
- Gold worth ₹20,000
- Bike worth ₹30,000
C loses only the gold. A’s liability reduces by ₹20,000 only.