Surety’s Right of Subrogation under IBC:
Since the advent of IBC, the issue relating to the right of subrogation of the surety under Sections 140 and 141 of the Indian Contracts Act, 1872 has become a talking point in legal circles. As per the scheme of IBC, the resolution plans once approved shall be binding on the corporate debtor, the creditors and the government authorities concerned in the corporate debtor. Therefore, in the event the resolution plan submitted by a prospective resolution applicant and deliberated upon by the Committee of Creditors does not absolve the sureties/guarantors from the liability that may remain even after approval of resolution plan and consequent restructuring of the debt of the corporate debtor or satisfaction of the debt after reducing the overall liability basis the liquidation value or resolution in any other manner, the liability of the sureties/guarantors will continue to remain undisturbed and the financial creditors shall be free to initiate bankruptcy proceedings against the surety/guarantorunder IBC when the insolvency proceedings are still pending or even after the resolution plans are approved by the adjudicating authority. In a situation where the surety/guarantor satisfies/pays off the remaining debt as claimed from the surety/guarantor, the surety/guarantor in the normal course has the right to be subrogated in the position of the creditor; however, since if the resolution plan does not take into account the future claims which the surety may exercise under subrogation rights nor does any mention in the resolution plan as to what will be the status of the surety/guarantor vis-à-vis the resolution applicant, the surety is left with no legal remedy against the principal debtor post the satisfaction by the surety/guarantor of the remaining dues of the creditors. This will eventually mean that the rights conferred or assured under one law are unduly taken away under the process set out under another law.
As a major relief to many of such sureties, in a recent judgement in the matter of Orbit Towers Private Ltd. Vs Sampurna Suppliers from the NCLT Kolkata bench has dealt with the right of subrogation of Guarantor and the liability of Corporate Debtor towards the Guarantor after his repayment of the debt owed by the Corporate Debtor.
The major issue argued in the above case was, when the Guarantor has repaid the amount of financial debt owed by the Corporate Debtor to the Bank, would it make the Guarantor a “Financial Creditor” eligible for proceeding against the Corporate Debtor under Section 7 of the IBC.
The NCLT Bench cited Sections 140 and 141 of the Indian Contracts Act, 1872 that led down “right of subrogation”, which entails the substitution of the Guarantor in place of the Creditor so that the Guarantor will liable for all the rights in reference to the debt in place of the Creditor
The NCLT ruled in favor of the Guarantor stating that the Financial Creditor was eligible and entitled to proceed against the Corporate Debtor for recovery of the dues.
However, the major issue of the guarantors’ rights is pending with the Hon’ble Supreme Court of India which is expected to finally decide the law with respect to right of subrogation and other issues incidental thereto. Till that time, the resolution plans are expected to ignore the rights of the guarantors and are likely to lead to legal battles.
Legal updates by Mr. Damodara Rao BM. – Joint Managing Partner
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