The Indian Contract Act, 1872
128. Surety’s liability
The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and charges which may have become due on it.
Contract of guarantee does not provide any contra-note pertaining to the liability of the surety so as to create an exception within the meaning of section 128; Industrial Finance Corporation of India Ltd. v. Cannonore Spinning & Weaving Mills Ltd., (2002) 5 SCC 54.
It is a settled law that the creditor would be entitled to adjust from the payment of a sum by a debtor towards the time barred debt from the guarantor’s account. The appellant did not act in violation of any law when he cut the amount from the fixed deposit of the respondent i.e. the surety when the principal debtor failed to pay; Punjab National Bank v. Surendra Prasad Sinha, AIR 1992 SC 1815.
The clauses of the guarantees executed by the appellant in favour of PICUP clearly show that the liability of the guarantors was to remain unaffected by the failure of PICUP to enforce its mortgage and hypothecation against the assets of the company. There is nothing in the contracts which can in any way be construed as contrary to the joint and several liability created under section 128; Kailash Nath Agarwal v. Pradeshiya Industrial & Investment Corporation of U.P. Ltd., (2003) 4 SCC 305.
The surety has given a continuing guarantee, limited in amount, to secure the floating balance which may from time to time be due from the principal debtor to the creditor, the guarantee is prima facie to be construed as being of part only of the debt. A continuing guarantee may even be for the fixed period. It is well settled that the guarantor cannot be made liable beyond the terms of the agreements; Aditya Naryan Chouresia v. Bank of India, AIR 2000 Pat 222.
Surety may be liable though the principals Contract is void
The Liability of the sureties is co-extensive with that of the principal debtor. Consequently creditor can proceed against the principal debtor or against the sureties, unless it is otherwise provided in the contract. The same should also be the principle with regard to the rights and liabilities between co-sureties as well. A co-surety cannot insist that the creditor should proceed either against the principal debtor or against other sureties before proceeding against him; Kerala State Financial Enterprises Ltd. v. C.J. Thampi, AIR 2000 Ker 36.