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CMA Foundation · Fundamentals of Business Laws and Business Communication · Meaning of Indemnity, Guarantee, Pledge, Agent

Tara guarantees the due payment of Nikhil's loan from Zenith Finance. Nikhil defaults, and Tara pays Zenith Finance the entire amount she was liable for. Which statement correctly describes Tara's rights now?

Tara is invested with all the rights Zenith Finance had against Nikhil. After the debt is due or default has occurred, a surety who pays or performs everything she is liable for steps into the creditor's position against the principal debtor, without needing any separate assignment.

  1. AShe can only claim back the amount if Zenith Finance agrees to assign the rights
  2. BShe has no rights, because a guarantee is a gratuitous promise
  3. CShe is invested with all the rights which Zenith Finance had against NikhilCorrect
  4. DShe can sue Zenith Finance for a refund of the amount paid

Explanation

Once the guaranteed debt is due or default has occurred, a surety who pays or performs all that he is liable for is invested with all the rights the creditor had against the principal debtor (Section 140). Tara therefore steps into Zenith Finance's position against Nikhil. No assignment or creditor consent is required, so the first option is wrong.

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