In a recent judgment dated June 27, 2022 in Orbit Towers Pvt. ltd against
Sampurna Suppliers Pvt. Ltd
., the NCLT Kolkata decided that a Corporate
Guarantor is entitled to initiate insolvency proceedings under Section 7 of the
Insolvency and Bankruptcy Code 2016 (hereinafter "IBC") against the Principal
Borrower using the Transitional Law even in the absence of an agreement between
the Guarantor and the Principal Borrower.
The NCLT has determined that the creditor's rights to recover the money from the
debtor would automatically transfer to the surety/guarantor. The guarantor who
has fulfilled the principal debtor's obligations that are the subject of his
suretyship has the right to put himself in the position of the creditor and to
enjoy all the rights that the creditor had against the principal debtor. The
purpose of this article is to analyse the current legal situation regarding the
guarantor's right of subrogation in the context of IBCs.
Factual Matrix Of The Case:
Sampurna Suppliers Pvt. ltd (hereinafter the "Corporate Debtor") needed funds
for its operations, so it turned to various banks and financial institutions for
a loan. Consequently, Indian Bank agreed to provide a loan of Rs.10.00.00.000/.
The loan had to be secured by collateral and other guarantees. Against this
background, the corporate debtor approached Orbit Towers Pvt. ltd (hereinafter
the "Corporate Guarantor") to act as corporate guarantor for the loan in favor
of Indian Bank.
In addition, the corporate debtor requested the corporate guarantor to place an
appropriate mortgage on the corporate guarantor's property. The corporate
The corporate guarantor and the corporate debtor agreed that the corporate
debtor should repay the loan along with accrued interest and obtain the release
of the mortgaged property. However, the Corporate Debtor has failed to pay its
instalments including but not limited to the accrued interest.
Following various requests from the Corporate Debtor, the Corporate Debtor made
a partial payment of Rs.2,60,00,000/- to the corporate guarantor to settle his
liability, thereafter a sum of Rs. 5,85,19,907/- remained due and payable to the
corporate guarantors. The legal debtor has acknowledged his liability for this
amount towards the legal guarantor by signing a balance confirmation from
04/01/2015 to 01/31/2015.
As the corporate debtor failed to pay the remaining instalments to the corporate
guarantor, the corporate guarantor filed a Section 7 application alleging
that it was a financial creditor under the IBC . The Corporate Debtor contested
the sustainability of the proceedings, arguing that the Corporate Guarantor
initiated the proceedings based on payments made by the Corporate Guarantor to
Indian Bank on behalf of the Corporate Debtor, Indian Bank's principal borrower.
The Corporate Debtor's contention was that the claim of the purported financial
creditor in its capacity as guarantor did not fall within the definition of a
financial liability under the IBC and therefore the Corporate Guarantor did not
qualify as a creditor under the IBC. The NCLT noted that the present case raised
an interesting legal issue relating to a guarantor's rights to indemnification
from the principal borrower's liability of the corporate debtor. Accordingly,
the NCLT proceeded to analyze the provisions of the Indian Contract Act, 1872
Analysis Of The Relevant Provisions
Right of Subrogation under the Indian Contract Act, 1872
Articles 140 and 141 of the Indian Contract Act, 1872 provide for the
right of subrogation. In accordance with these provisions, the bond is endowed
with all the rights that the obligee has against the principal obligor after
paying or fulfilling the guaranteed debt upon maturity of that debt, which
corresponded to the principal obligor's breach of the guaranteed obligation. .
The entire doctrine of principal and suretyship with all its contributory
consequences etc., which was developed from the established principles of a
Court of Equity, is derived from the common law.
The guarantor is entitled to all means against the principal that the creditor
has against the principal to enforce all guarantees and all means of payment, to
put himself in the creditor's position, etc.
In Bank of Bihar v. Damodar Prasad
, the Supreme Court has held that it
is the bail's duty to pay the debt and upon such payment, the bail is entitled
to collect the full amount from the principal debtor. The law of bail is not
based on the treaty principles, but on the principle of natural law. Therefore,
the guarantor is entitled to all resources that the creditor has towards the
debtor to execute all guarantees and all means of payment, including through
registered titles, without knowing that the guarantor has the right to transfer
these titles to you.
However, the subrogation right has been given a different pedestal under the IBC
regime discussed below.
Right of subrogation under the IBC
In the present case, the Indian Bank, i.e. the creditor, has not initiated any
proceedings under the IBC against the debtor company. Rather, the corporate
guarantor repaid the loan amount and released the liability of the corporate
debtor. In view of this, the corporate guarantor claimed that all the rights of
the then creditor, i.e. the Indian bank was granted to the corporate guarantor.
The NCLT found that since the Corporate Guarantor has repaid the amount of the
Corporate Debtor's financial debt to the Bank of India, the Corporate Guarantor
is treated as a "financial creditor" and can take action against the Corporate
Debtor without an agreement between the two.
Principles of contract law do not require to have a written agreement in order
for a guarantor to exercise its right of subrogation. Once the guarantor settles
the principal's obligation to the creditor, all rights of the creditor to
recover the money automatically pass to the guarantor.
The NCLT also found that after the corporate guarantor has performed the
obligations of the principal, it is entitled to substitute itself for the
creditor and enjoy any rights that the creditor would enjoy against the
In view of the foregoing, Orbit Towers Pvt. ltd (the Company Guarantor) by
paying the debt on behalf of Sampurna Suppliers Pvt. Ltd. (the main borrower)
has replaced Indian Bank (the creditor). Consequently, all rights of Indian Bank
are in favor of Orbit Towers Pvt. ltd assigned, who is entitled and entitled to
oppose Sampurna Suppliers Pvt. Ltda. to proceed for reimbursement of these fees.
Therefore, the petition was found acceptable under Section 7 of the IBC.
Similarly, in the case of Davindra Ahluwalia & Anr. v. M/s Sumit Aviation
ruled by the NCLT Delhi in 2017 that the NCLT granted the personal guarantor
request under Section 7 of the IBC.
In this case, the personal guarantor had settled the corporate debtor's
liability. However, failing to collect the installments from the joint and
several debtor, the personal guarantor instituted proceedings against the joint
and several debtor under Section 7 of the IBC, which were approved by the
contracting authority. It is important to note that while the NCLT Delhi allowed
the petition in this case, the court did not discuss the subrogation provisions.
There are currently different views on this topic. In our opinion, the view of
the NCLT Kolkata in this case is progressive and adequately protects the rights
of citizens. Since the liability of guarantors is equal, the recent judgments
provide much-needed protection for guarantors who have fulfilled their
obligations under the contract of guarantee.
- Orbit Towers Pvt. Ltd. Vs. Sampurna Suppliers Pvt. Ltd.,(2022) ibclaw.in
- The Insolvency and Bankruptcy Code, 2016 (Act 31 of 2016), s.7
- The Indian Contract Act, 1872 (Act 9 of 1872), s.141
- The Indian Contract Act, 1872 (Act 9 of 1872), s.142
- Bank of Bihar v. Damodar Prasad AIR 1969 SC 297
- Davindra Ahluwalia & Anr. v. M/s Sumit Aviation, IB No. (IB)-229