The surety's liability is co-extensive with that of the principal debtor unless the contract provides otherwise.
Net Worth & Solvency Glossary · Solvency & Courts
Surety: The Financial Proof Courts Ask a Guarantor For
noun · plural "sureties" · to "stand surety" is to put your own money and property behind someone else's promise
Definition
A surety is a person who undertakes to answer for another person's obligation if that person fails to meet it.
Under section 126 of the Indian Contract Act, 1872, a contract of guarantee has three parties: the surety, who gives the guarantee; the principal debtor, for whose default it is given; and the creditor, to whom it is given.
Three parties to one guarantee
Section 126, Indian Contract Act, 1872
Creditor or courtto whom the guarantee is given
Principal debtorfor whose default it is given
Suretywho gives the guarantee
obligation
undertaking
answers on default
- In court
- Stands behind an accused person's bail bond.
- In business
- Guarantees repayment of a loan or performance of a contract.
- In law
- The guarantor in a loan and a surety are the same role.
The role
01Who can stand as a surety and what they undertake
To "stand surety" is to put your own money and property behind someone else's promise. In court practice, a surety typically stands behind an accused person's bail bond, undertaking that the person will appear and accepting liability for the amount the bond sets if they do not. In commercial practice, a surety guarantees repayment of a loan or performance of a contract on the same principle. "Sureties" is simply the plural.
The role is not a character reference. It carries a real financial exposure that can be enforced against the surety personally. Under section 128 of the Indian Contract Act, 1872, the surety's liability is co-extensive with that of the principal debtor unless the contract provides otherwise. The surety can be asked to pay what the principal owes, up to the extent of the guarantee.
What the Contract Act takes from a surety, and what it gives
A surety is discharged as to later transactions where the creditor varies the terms of the contract with the principal debtor without the surety's consent.
A surety is entitled to the benefit of every security the creditor held when the guarantee was given.
The Act gives other routes to discharge as well. A surety is discharged by any contract between the creditor and the principal debtor that releases the principal debtor, or by any act or omission of the creditor whose legal consequence is the principal debtor's discharge (section 134), and where the creditor acts inconsistently with the surety's rights, or omits an act the creditor's duty to the surety requires, and the surety's eventual remedy against the principal debtor is impaired as a result (section 139). A surety who pays or performs all that the surety is liable for takes over all the rights the creditor had against the principal debtor (section 140), and the principal debtor is under an implied promise to indemnify the surety for whatever the surety has rightfully paid under the contract (section 145).
On paper
02The standing a surety is expected to demonstrate on paper
The standing a surety shows is their own, not the principal's: personal assets, personal liabilities and evidence of both.
Courts and lenders test whether a proposed surety is actually good for the amount. A signature and a stated willingness are not enough.
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The usual proof
Property
The usual proof, supported by the title document and a record of anything registered against it. A property already mortgaged secures someone else first.
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Where the amount is modest
Income records
Salary certificates and tax returns may be accepted where the amount is modest.
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Where the amount is larger
A solvency certificate
Often asked for where the amount is larger. It is written to the specific sum the court or authority has named, because a general statement of wealth does not answer the question being asked. A CA prepares a solvency certificate for that purpose.
From the day they sign
Because a surety's exposure exists from the day they sign, it belongs on their own financial statement as a contingent liability, not only on the principal's.
Court practice
03Bail bonds, property papers and solvency proof before Indian courts
The surety's file
What the file usually holds
- A solvency certificate for the bond amount
- The title documents for any property offered
- An encumbrance certificate
- The latest property tax receipt
- Identity proof
Practice varies between courts, and the safest course is to ask the court's section clerk what that court expects.
Three practical points recur
- 1Joint property needs the other holder
Where property is held jointly, the other holder is generally required to join. If they will not, the property usually cannot be offered.
- 2Originals at the hearing
Original documents are commonly asked for at the hearing, with copies kept by the court.
- 3A surety within reach
Courts often prefer a surety who lives within their reach, because such a surety is easier to proceed against. This is a matter of practice, not of law.
Insurance-backed surety bonds used in contracting are a different product and are not covered here.
Written by Subham Jhunjhunwala · Reviewed by CA Sundram Gupta
Sources: Indian Contract Act, 1872, Chapter VIII, sections 126, 128, 133 and 141 (India Code). This entry describes Indian practice in general terms and is not legal advice on a particular case.
Need help with a certificate that uses surety? See our Solvency Certificate.