Under right of subrogation guarantor is entitled to initiate cirp against principal borrower

ORBIT TOWERS PVT. LTD. V SAMPURNA SUPPLIERS PVT. LTD.,
C.P (IB) NO. 2046/KB/2019
KOLKATA NCLT-BENCH
Date of Order: 27/06/2022

THE NATIONAL COMPANY LAW TRIBUNAL ("NCLT"), KOLKATA BENCH-held that if a Guarantor pays the debt on behalf of the Principal Borrower, then it steps into the shoes of the Creditor and can initiate Corporate Insolvency Resolution Process ("CIRP") again the principal borrower.

BRIEF FACTS

1. This petition under section 7 of the Insolvency and Bankruptcy Code, 2016 read with Rule 4 of the Insolvency and Bankruptcy (ApplicationtoAdjudicating Authority) Rules, 2016 has been filed by Orbit Towers PrivateLimited, through its Director namely Mr. Pramod Kumar Eshwa, authorized vide Board Resolution dated 27.09.2019 (hereinafter referred to as the Financial Creditor) for initiation of Corporate Insolvency Resolution Process in respect of Sampurna Suppliers Private Limited, (hereinafter referred to as the Corporate Debtor).

2. In 2011, Sampurna Suppliers Pvt. Ltd. ("Corporate Debtor") had availed a loan of Rs.10,00,00,000/- from the Indian Bank.

3. Upon the request of CorporateDebtor, Orbit Towers Pvt. Ltd. ("Financial Creditor") had given corporate guarantee for the said Loan and had also created an equitable mortgage of its property situated in Kolkata in favour of Indian Bank.

4. The Corporate Debtor was obligated to repay the loan amount of Rs.10,00,00,000/- along interest and to obtain release of the Financial Creditor's property at Kolkata.

5. However, the Corporate Debtor failed to do so and the Financial Creditor( Orbit) paid Rs.8,45,19,907/- to the Indian Bank in capacity of a Corporate Guarantor.

6. Thereafter, the Corporate Debtor(Sampurna) paid Rs.2,60,00,000to the Financial Creditor( Orbit) towards part discharge of its liability and a sum of Rs.5,85,19,907/- remained due and payable.

7. In this case the liability of Principal Borrower (Corporate Debtor) was discharged by the Guarantor (Financial Creditor).

THE MAIN ISSUE BEFORE TRIBUNAL

8. When the Surety has repaid the amount of financial debt owed by the Corporate Debtor to the Indian Bank, would it make the Surety a "FinancialCreditor", eligible for proceeding against the Corporate Debtor (Principal Borrower) without there being any agreement between the two?

ANALYSIS BY THE NCLT BENCH

9. The NCLT Bench observed that Sections 140 and 141 of the Indian Contracts Act, 1872 talk of "right of subrogation", which entails the substitution of another person in place of the Creditor, so that the person substituted will succeed to all the rights of the creditor with reference to the debt. The guarantor's right to be placed in the creditor's position on the discharge of the principal debtor's obligation, to the extent that the Guarantor's property or funds have been used to satisfy the Creditor's claim and to effect such discharge is called the Guarantor's right of subrogation."

SECTION 140 OF THE INDIAN CONTRACT ACT 1872 is about Rights of surety on payment or performance. It is under CHAPTER VIII of the Act. CHAPTER VIII is titled OF INDEMNITY AND GUARANTEE.

RIGHTS OF SURETY ON PAYMENT OR PERFORMANCE

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.

SECTION 141 IN THE INDIAN CONTRACT ACT, 1872

SURETY’S RIGHT TO BENEFIT OF CREDITOR’S SECURITIES. - A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

Example:C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B’s furniture. C, cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.

Examples: Suppose Mr. A has given guarantee for securing loan given by c to Mr. B. Mr. B has not repaid the loan with interest at the time of maturity or according to the terms and conditions of Loan Agreement and he has paid all outstanding dues to Mr. C. In this case Mr. A gets same rights against Mr. B as Mr. C has , it means that Mr. A can sue Mr. B for payment made by him to Mr. C and this is “ Right of Subrogation".

THE RIGHT OF INDEMNITY(SECTION 145)

In every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee. This is because the surety has suffered a loss due to the non-fullfillment of promise by the principal debtor and therefore the surety has a right to be compensated by the debtoR.

SUBROGATION

Subrogation is a term describing a right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured. This is done in order to recover the amount of the claim paid by the insurance carrier to the insured for the loss.

KEY TAKEAWAYS

• Subrogation is a term describing a legal right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured.
• Generally, in most subrogation cases, an individual’s insurance company pays its client’s claim for losses directly, then seeks reimbursement from the other party's insurance company.
• Subrogation is most common in an auto insurance policy but also occurs in property/casualty and healthcare policy claims.

10. It was further observed that Section 140 provides that rights of surety of payment or performance, where a debt has become due on default of the Principal Debtor to perform, the surety upon making payment or performance of all that, is eligible for and is invested with all the rights which theCreditor had against the Principal Debtor. The Creditor had the rights to sue the Principal Debtor. The Guarantor may therefore, sue the PrincipalPrincipal Debtor, having got invested with all rights of the Creditor.

11. Therefore, under the provisions of the Indian Contract Act, 1872, all the rightof the then Creditor i.e. the Indian Bank, would automatically become the rights of the Surety (Financial Creditor).

12. On the issue of absence of any agreement between Corporate Debtor and Financial Creditor, it was held that: "Any agreement of guarantee between the the Indian Bank and the Guarantor is sufficient for the purpose of bestowing all the rights of the Bank/creditor upon the Financial Creditor herein once the Financial Creditor has discharged all the liability of the Corporate Debtor towards Indian Bank. There may or may not be any agreement between the
financial Creditor and the Corporate Debtor. It does not make any difference at all.

13. The Law is very clear that once the Guarantor/surety discharges the liability of the Principal borrower towards the creditor, all the rights of the Creditor to recover that money would automatically be transferred in favour of the surety/ Guarantor. This is exactly the right of subrogation."

DECISION OF THE NCLT BENCH

14. Thus the Bench held that the Financial Creditor was eligible and entitled to proceed against the Corporate Debtor for Recovery of the dues and file the petition under Section 7 of the IBC before Adjudicating Authority or before any other Forum of competent jurisdiction.

15. The petition was admitted and CIRP was initiated against the Corporate Debtor.

CONCLUSION

A contract of guarantee is of between three persons Creditor, Debtor and the Surety. The Contract of Guarantee generally made to protect interest of the creditor and provide him trust and security for payment of debt advanced to the Corporate Debtor. The surety or the guarantor has rights against other parties to the agreement and liability of the surety is co-existence with that of principal debtor unless it is otherwise provided in the contract. If there found any mis statement or mis representation of material facts on behalf of the creditor then contract become invalid. the provisions of Sections 140 & 141 of the Indian Contract Act, 1872 clearly provides that a guarantor paying all outstanding dues of a Corporate Debtor to the Bank get all rights of creditor ( bank ) against the Corporate Debtor to the extent the amount paid by him. The Guarantor enters shoes of creditor and can sue Corporate Debtors to claim amount paid by him to the Bank or Creditor on behalf of Corporate Debtor.

DISCLAIMER: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.