The Supreme Court (SC) in a landmark judgment delivered on 8th July 2025 in SC/CHC/Appeal No. 24/2008, has revisited and clarified the foundational legal concepts of suretyship and indemnity under Sri, pertaining to personal guarantees.
In this case Their Lordships have re-affirmed the stance of the Commercial High Court judgment by which the two sureties/directors were made liable, in their capacity as sureties/guarantors, for the repayment of two loans granted to M/s Seneviratne Trading Company (Private) Limited (the Company/ Principal Debtor).
Case Summary
This case arose from Sampath Bank’s (the Bank) attempt to recover rescheduled loans amounting to over LKR 200 million from the Company. The loan was secured inter alia by joint and several guarantees issued by the Company’s two directors. After the Company defaulted on the loans it was subsequently wound up in 2005 by a separate court proceeding. Thereafter the Bank instituted action in the Commercial High Court (CHC) against the 2 Directors claiming under the personal guarantees issued by them in respect of this loan facility. The CHC delivered judgment in favour of the Bank holding the directors liable under the said personal guarantees.
The Directors appealed this judgment to the SC where the following questions of law were considered by the SC:
- Where the Principal Debtor is in default, whether the guarantee that the guarantors have executed in favour of the Bank required the Bank to proceed against the Principal Debtor who is the Company in the first instance, and if so, whether the Bank can proceed against the Guarantors only after the Principal Debtor has been excussed.
- Whether the relevant clause of the guarantee, by which the guarantor had renounced their right to raise certain defences available to a surety including the defence that the Principal Debtor be pursued and excussed (beneficium ordinis seu excussionis), is valid and enforceable in terms of the law.
The SC proceeded to affirm the judgment of the Hon. CHC Judge while offering a detailed analysis of the defences available to sureties particularly those available under the Roman-Dutch law (RDL), where the following matters were reviewed.
Suretyship and Indemnity under RDL
The Court first considered the concepts of suretyship and indemnity and whether they are the same or different and whether they could be used interchangeably. The Court observed that although the terms “guarantee” and “indemnity” are sometimes used interchangeably, they are conceptually distinct.
Suretyship is a contractual arrangement by which one person undertakes responsibility to a creditor for the debt or obligation of the principal debtor. The obligation of the surety is accessory and arises in support of the principal obligation and becomes enforceable typically when the principal debtor fails to fulfil the obligation. In an indemnity, on the other hand, and generally speaking, a primary liability would fall upon the surety, with liability being wholly independent of any liability which may arise as between the principal and the creditor.
The Court then proceeded to review the scope and application of defences available to guarantors under RDL, in particular the defence of beneficium ordinis seu excussionis.
(the legal right of the guarantor/surety to require that the principal debtor be excussed1 first by the creditor.
The Law of Excussion – Beneficium ordinis seu excussionis (benefit of order or benefit of excussion)
The SC observed that, whilst this is indeed applicable to guarantors, they also have the option of renouncing the same at the time of executing the guarantee. The question before Court in this particular case has been whether the renunciation has to be specific or whether a general renunciation would suffice.
The present law on renouncing the defence of beneficium ordinis seu excussionis is that a general renunciation is also valid if the surety is an Attorney-at-Law, or if its effect has been explained to the surety by the beneficiary, or is clearly evident from the document itself (with the surety bearing the burden of proving otherwise). Additionally, renunciation may be implied where the surety signs as a co-principal debtor, agrees to pay any sum on demand, or consents to joint legal action with the principal debtor.
The Judges stated that under Roman-Dutch law, a surety may invoke the beneficium ordinis seu excussionis, which requires the creditor to first pursue the principal debtor before proceeding against the surety. In this case, the Court found that relevant clauses of the guarantee amounted to a clear and specific renunciation of that defence, expressed in plain language. As the defendants were experienced businessmen who understood the effect of the guarantee, the Bank was entitled to proceed directly against them without first excussing the principal debtor.
The Court also took into consideration that the directors were experienced businessmen, had signed similar documents previously, and that the language in the relevant clause was clear, plain, and understandable. There was no evidence they misunderstood their obligations.
Concept of Co-Debtor
Here the Court went on to explain that the co-debtor is a person who binds themselves not merely as a surety, but as a person directly and primarily liable for the debt—on the same footing as the principal debtor.
This means that their liability is not secondary or conditional, but equal and independent, and they can be sued directly, even before or without suing the principal debtor. They are not entitled to invoke the benefit of beneficium ordinis seu excussionis (that the creditor must first proceed against the principal debtor), because they stand in the shoes of the principal debtor.
Conclusion
This judgment reinforces that guarantors remain bound by the obligations they assume, especially where renunciations are clear. By clarifying the scope of suretyship, indemnity, and co-debtor liability, the Supreme Court has strengthened the enforceability of personal guarantees under Sri Lankan law.
