INTRODUCTION
Before discussing the advantages and disadvantages it is necessary to make clear what a right to subrogation is as well as the perquisites for becoming a guarantor. In the case of Morgan v Seymore [1]the courts determined that the surety may assume in the place of the creditors and have the same rights against the major debtor as the creditor if the guarantee has completed the honoured commitments and reimbursed the debt or dues. Unless otherwise specified in the contract statute, the debtors and guarantors are jointly and severally liable under section 128(3) [2]of the Indian contract Act of 1872. In the case, the debtor and guarantor are both liable for the obligation and the creditor may demand.
In the absence of any stated stipulations to the contrary in the contract, this means that the lender is not required to use all of its available remedies against the borrower before taking legal action against the guarantor. When a guaranteed debt become due or the principle debtor fails to fulfil a promised duty, section 140 provides that the surety is invested with all the right which the creditor has against the principle debtor upon payment or performance of all that he is liable for. It indicates that subrogation happens when the surety steps into the shoes of the creditors following payment of the creditor’s debt. The subrogation right is based on the equitable idea that the guarantor should get compensation. However as soon as guarantor has forfeits its right to file a claim against the corporate debtor under the IBC once it has completed its commitments to the corporate debtor’s creditors. We’re here to discuss the eligibility of a guarantor under the IBC for subrogation as well as advantages and disadvantages of doing so.
ANALYSIS
RIGHT TO SUBROGATION UNDER IBC[3]
In the order to secure reimbursement the surety who pays the debt assumes the responsibilities of the creditor and is liable to all of the creditors responsibilities. It is the most basic principle of natural justice according to the court in the case of Amrit Lalan Goverdhan v. State Bank of Travancore[4], in this the surety or guarantee is subrogated to the liabilities of the creditor with regard to the major debtor which allows the guarantor to act in the capacity of the creditor and for the enforcement of all the creditor’s collateral against the borrower for whom the payment is made. In the case of Madhya Pradesh V. Kaluram [5]the courts interpreted that the surety has a claim to the creditor’s rights against the principle debtor arising from the transaction that the surety has a claim to the creditor’s rights against the principle debtor arising from the transaction that give rise to the right or obligation upon payment of the debt or execution of everything for which he is liable. As a result the surety has the right to be positioned in connection to the principle debtor following the payment of the amount owned by the major debtor they are similar to creditor in position.
Moving further a party is seen to have been unfair benefited if his financial situation has significantly improved or the financial burden has been removed if a corporate borrower is not required to pay the guarantee. If the guarantor’s funds were actually utilised to accomplish the improvement the enrichment would be at their expense. The principle borrower is released from all claims against the creditor if the surety uploads its end of the bargain however if the guarantor is denied the right to subrogation the principle borrower unfairly benefits from the guarantor’s funds because the sum paid to the creditor is the guarantor’s sum while the surety has a equitable right to be subrogated. However the IBC regime does not include the right to subrogation therefore the guarantee does not have the power to initiate legal proceedings against the corporate debtor once the guarantor has paid it back the corporate debtor’s creditor. The guarantee concept, a vital component of any business transaction, is built on the right of subrogation. The examination of the consequences of this denial of the right ogf subrogation under the IBC is therefore important.
It is important to track the markets adverse side impact. Without recovery rights th guarantors will be reluctant to engage as guarantors in any transaction, which will have a huge influence on the credit market which is fundamentally dependent on all transactions. In addition, the plan’s absence from the right to subrogation breaches section 30(2)(e) because it conflict with the latest revision of the Indian contract Act from 1872. The IBC regime has however restricted the guarantors from enforcing their claim to subrogation. In Lalit Mishra & Ors, it was first attempted. The jurisdiction is that recognizing the right to subrogation would lead tp guarantors filling claims against the resolution applicant, negating his entire goal of stepping forward to purchase and revive the business because he would be obligated to pay the same sum that was due. By balancing the interest of all creditors and regaining the company’s viability, CIRP seeks to optimise the asset value of the company and save it from bankruptcy. Giving the guarantors the authority to pay back the loan using assets belonging to the corporate debtor will cause the cycle of non payment default and recovery to start afresh placing strain on the business assets and defeating the goal of the CIRP. [6]
The NCLT did, however, declare that because IBC lawsuits are not recovery processes, the guarantor cannot exercise its right of subrogation under the contract Act. In accordance with section 238 of the IBC code 2016 also referred to as the non obstante provision the code shall take precedence over all other laws that ae in conflict with it. Using the same logic, the supreme court rejected the claim in Essar Steel India Ltd. Committee of creditors v. Satish Kumar Gupta where the claimant sought compensation from the resolution applicant by exercising the right to subrogation after it had fulfilled its obligations to creditors. The supreme court reasoned that the guarantor is not released from its liability even after the approval of a resolution plan.
CONCUSION
A careful reading of this article reveals that the position of a guarantor under the IBC regime remains unclear. The resolution applicant may be required to pay the guarantor if the right to subrogation is allowed which is contradictory to the IBC’s objective of reviving the firm by maximising the value of its assets and was not the aim of parliament when it created this Act. Further because the right to subrogation is an equitable one, it may be against the natural justice principle if it is not granted to the guarantor. All of the examples involving the use of equitable subrogation to stop or stop unjust enrichment involve flawed transactions. The law is still developing as a result, and it is hoped that these issues will be handled in due courses.