Imp. Rulings - Guarantor’s Right of Subrogation
Index;
SCI (2024.07.23) in BRS Ventures Investments Ltd. Vs. SREI Infrastructure Finance Ltd. and Anr. [(2024) ibclaw.in 170 SC, Civil Appeal No. 4565 of 2021] [Equitable right the surety gets under Section 140]
NCLAT (2022.09.30) in K.V. Jayaprakash Vs. State Bank of India [Company Appeal (AT) (Insolvency) No. 362 of 2022 ] [claim as Creditor of Corporate Debtor]
NCLT Kolkata (2022.06.27) in Orbit Towers Private Limited vs. Sampurna Suppliers Pvt. Ltd., [C.P (IB) No. 2046 /KB/2019) [Entitled to file the petition under section 7 of the Code]
------------------------------------------------------
The Indian Contract Act, 1872
# Section 140. 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. —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."
Attributes of right to Subrogation
RIght of subrogation”. It is 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.
The Guarantor who performed the obligations of the Principal Debtor which are subject to his guarantee is entitled to stand in the shoes of the Creditor to enjoy all the rights that the Creditor has against the Principal Debtor.
Any agreement of guarantee between the Bank/creditor 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. 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.
“The right of subrogation provides that all the rights of the creditor with reference to the debt or obligation of the principal debtor that has been discharged by the surety/Guarantor would go to the surety.
The Guarantor, who has performed the obligations of the principal debtor which are the subject of his guarantee, is entitled to stand in the shoes of the creditor and to enjoy all the rights that the creditor had as against the principal debtor.
---------------------------------------------------------------
1). SCI (2024.07.23) in BRS Ventures Investments Ltd. Vs. SREI Infrastructure Finance Ltd. and Anr. [(2024) ibclaw.in 170 SC, Civil Appeal No. 4565 of 2021] held that;
# 24. Now, we come to the argument based on subrogation as provided under Section 140 of the Contract Act. Reliance was placed by both parties on conflicting decisions of different High Courts. Therefore, this issue will have to be resolved. Section 140 is relevant which reads thus:
“140. 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.”
The words used in Section 140 are “upon payment or performance of all that he is liable for”. When the principal debtor commits a default and when the liability under the deed of guarantee of the surety is not limited to a particular amount, its liability is in respect of the entire amount repayable by the principal debtor to the creditor. The words ‘all that he is liable’ used under Section 140 cannot be ignored. The principal borrower must continuously indemnify the surety. Section 140 of the Contract Act may be founded on the said obligation. The 1st respondent-financial creditor relied upon a decision of this Court in the case of Economic Transport Corporation, Delhi4, which holds that the doctrine of subrogation is a creature of equity. Therefore, the Section will have to be interpreted having regard to the equitable principles. If the surety pays the entirety of the amount payable under guarantee to the creditor, Section 140 provides a remedy to the surety to recover the entire amount paid by him in the discharge of his obligations. Therefore, the surety gets invested with the rights of the creditor to recover from the principal debtor the amount which was paid as per the guarantee. If the surety pays only a part of the amount payable to the creditor, the equitable right the surety gets under Section 140 will be confined to the debt he cleared.
------------------------------------------------------
2). NCLAT (2022.09.30) in K.V. Jayaprakash Vs. State Bank of India [Company Appeal (AT) (Insolvency) No. 362 of 2022 ] held that;
# 54. In view of the law laid down by the Division Bench of the Delhi High Court, Moratorium under Section 14 or restriction under Section 33(5) of I.B.C is not a bar to proceed against this appellant herein under SARFAESI Act for recovery of debt based on mortgage created in favour of 1st Respondent executing agreement of guarantee.
# 78. In any view of the matter, the appellant being a Personal Guarantor discharged part of the loan payable by the Corporate Debtor, he is entitled to recover the amount under Section 140 of the Indian Contract Act, as if he is a creditor, but not a ‘Secured Creditor’ as defined under Section 3(30) of the I.B.C, since no security interest was created in favour of the creditor.
# 79. No doubt, when the assets of the corporate debtor is sold, he may not have any chance of recovery of amount proceeding against the ‘Corporate Debtor’, but, there are different modes of recovery of the debt due by the ‘Corporate Debtor’ under the general law. Therefore, the appellant who stepped into the shoes of creditor in terms of Section 140 of the Indian Contract Act, is entitled to recover the debt irrespective of sale of assets of corporate debtor in liquidation process in any of the recognized modes. Therefore, he cannot be included in the list of secured creditors, as no security interest was created in favour of the guarantor and he would not fall within the definition of ‘Secured Debtor’ as defined under Section 3(31) of I.B.C consequently, cannot be included in the list of secured creditors in the liquidation process, so as to claim share.
# 82. In view of law laid down by Apex Court, we have no hesitation to hold that the provisions of IBC will prevail over the provision of Indian Contract Act, thereby surety may take appropriate steps to claim as creditor to recover the amount he discharged to the Creditor under the agreement of guarantee in view of clause ‘h’ and ‘I’ of Section 5(8) of IBC, but not as secured creditor, before the liquidator if the 2nd Respondent did not finalise the list of Creditor, subject to permissibility under Section 38, Chapter III of IBC and limitation. Accordingly, the point is held against the Appellant and in favour of Respondents.
# 83. In view of complexity of questions raised, we summed up our findings as follows:
(1) Petitioner/Appellant is not entitled to claim any relief under Section 60(5) of IBC being 3rd Party to IBC proceedings.
(2) Imposition of moratorium is not a bar to recover the amount proceeding against the guarantor under SARFAESI Act, since the agreement of guarantee is an independent contract.
(3) Petitioner/Appellant is entitled to claim as Creditor of Corporate Debtor in view of Section 140 of Indian Contract Act, but not as Secured Creditor as no security interest is created in his favour, subject to limitation provided in Chapter III of IBC.
(4) The provisions of IBC will override the provisions of Indian Contract Act.
[ Link Synopsis ]
-----------------------------------------------------
3). NCLT Kolkata (2022.06.27) in Orbit Towers Private Limited vs. Sampurna Suppliers Pvt. Ltd., [C.P (IB) No. 2046 /KB/2019) held that;
# 20. Now, interesting question of law has arisen in this matter, where the liability of the principal borrower (Corporate Debtor herein) has been discharged by the Guarantor (Financial Creditor herein). Sections 140 and 141 of the Indian Contracts Act, 1872 talk of “right of subrogation”. It is 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. The Guarantor who performed the obligations of the Principal Debtor which are subject to his guarantee is entitled to stand in the shoes of the Creditor to enjoy all the rights that the Creditor has against the Principal Debtor. 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 the Creditor had against the Principal Debtor. The Creditor had the rights to sue the Principal Debtor. The Guarantor may therefore, sue the Principal Debtor having got and invested with all rights of the Creditor. Section 141 of the Indian Contract Act,1872 further provides that the surety is entitled to the benefit of every security which the creditor has against the Principal Debtor, at the time when the contract of surety-ship 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.
# 25. We have gone through all the pleadings and the documents placed on record by the Financial Creditor and the Corporate Debtor. In this matter admittedly the amount of debt has been repaid by the Financial Creditor to Indian Bank in its capacity as Guarantor for and on behalf of the Corporate Debtor, which has put the Guarantor in the shoes of the Creditor i.e. Indian Bank. When all the rights of the Creditor have been subrogated in favour of the Guarantor/Financial Creditor herein, the Financial Creditor is eligible and entitled to proceed against the Corporate Debtor for recovery of the said dues and file the petition under section 7 of the Code before this Adjudicating Authority or before any other Forum of competent jurisdiction. We, therefore, hold that the Financial Creditor is entitled to file this petition as Financial Creditor against the Corporate Debtor.
[ Link Synopsis ]
---------------------------------------------------
No comments:
Post a Comment