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CS Professional · Banking and Insurance - Laws and Practice · Advances, Securities and Documentation

Mr. Iyer stood surety for Kaveri Textiles' loan of Rs 5,00,000 from a bank. After Kaveri defaulted, Mr. Iyer paid the bank everything he was liable for. The bank held a charge on Kaveri's machinery for this loan. What can Mr. Iyer do?

Mr. Iyer steps into the bank's position. On paying all he is liable for after the debt falls due, a surety is invested with all the creditor's rights against the principal debtor, including the charge on Kaveri's machinery.

  1. AExercise the rights the bank had against Kaveri Textiles, including the charge on the machineryCorrect
  2. BOnly claim a refund from the bank
  3. COnly sue Kaveri on a fresh contract, with no access to the bank's rights
  4. DNothing, since the charge ends once the bank is paid

Explanation

Once the guaranteed debt is due and the surety pays all that he is liable for, he is invested with all the rights the creditor had against the principal debtor. This includes the charge on the machinery. The bank has no refund liability, and the charge does not vanish for the paying surety.

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