Section 140 Contract Act: Rights of surety on payment or performance

Section 140 of Indian Contract Act: Rights of surety on payment or performance

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.

Statutory Defined Terms in this Section: (Click any term for official legal definition)

Contract Sec 2(h)

Legal Commentary & Landmark Judgments: Section 140

Where a guaranteed debt has become due or default has occurred, and the surety pays the debt or performs all that they are liable for, the surety is invested with all the rights which the creditor possessed against the principal debtor. This statutory codification of the doctrine of subrogation ensures that upon discharging the obligation, the surety steps directly into the shoes of the creditor.

Contract of Guarantee & Suretyship: The surety acquires not merely a personal claim for reimbursement against the debtor, but succeeds to all remedies, securities, priority rights, and statutory advantages enjoyed by the creditor, including the right to enforce mortgages, hypothecations, and personal covenants.
Core Legal Standard: In corporate insolvency proceedings under the IBC, a guarantor who has satisfied the creditor's claim is subrogated to the creditor's status as a financial or operational creditor, entitling the guarantor to lodge claims and participate in the Committee of Creditors (CoC) to recover the outlay from the corporate debtor's resolution or liquidation estate.

Key Landmark Precedents:

Amrit Lal Goverdhan Lalan v. State Bank of Travancore (AIR 1968 SC 1432): The Supreme Court held that the surety is entitled under Section 140 to all the remedies which the creditor has against the debtor, including all securities held by the creditor, the moment the surety pays the guaranteed debt.
Industrial Finance Corp of India v. Cannanore Spg & Wvg Mills Ltd (2002) 5 SCC 54: The Supreme Court reaffirmed that subrogation under Section 140 is an equitable and statutory transfer of all rights and securities to the paying surety.

Legal Commentary:

Subrogation under Section 140 is complete only when the surety has satisfied the entire debt or the full extent of their guaranteed liability. A partial payment that leaves the creditor unpaid in part does not permit the surety to compete with the creditor against the debtor's assets.

Section 140: Rights of surety on payment or performance

Section 140 of Indian Contract Act: Rights of surety on payment or performance

Legal Commentary & Landmark Judgments: Section 140