According to Section 140 of the Indian Contract Act. 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 has against the principal debtor.’ This right of the surety is referred to as subrogation. In other words, it refers to the payment made on the guaranteed debt, or performance of the guaranteed duty, the surety becomes the creditor.
B is indebted to C, and A is surety for the debt. C demand payment from A and, on his refusal, sues him for th6 amount. A defends the suit, having reasonable grounds for doing so, but he is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt.
A guarantees to C, to the extent of Rs, 2,000, payment for rice to be supplied by C to B. C supplies to B rice for an amount which is less than Rs. 2,000 but obtains from A payment of the sum of Rs, 2,000 in respect of the rice supplied. A cannot recover from B more than the rice actually supplied.