The NCLT, Kolkata on June 27, 2022 in the matter of Orbit Towers Pvt. Ltd. v. Sampurna Suppliers Pvt. Ltd. while deciding a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, held that if a guarantor pays the debt on behalf of the Principal Borrower, it steps into the shoes of the creditor and can initiate Corporate Insolvency Resolution Process (“CIRP”) against the Principal Borrower.

In this matter, Sampurna Suppliers Pvt. Ltd. (“Corporate Debtor”) availed a loan of Rs.10,00,00,000/- from the Indian Bank. Upon the request of Corporate Debtor, 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.

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. However, the Corporate Debtor failed to do so and the Financial Creditor paid Rs.8,45,19,907/- to the Indian Bank in capacity of a Corporate Guarantor. Thereafter, the Corporate Debtor paid Rs.2,60,00,000/- to the Financial Creditor towards part discharge of its liability and a sum of Rs.5,85,19,907/- remained due and payable. The liability of Principal Borrower (Corporate Debtor) was discharged by the Guarantor (Financial Creditor).The Financial Creditor filed a petition under Section 7 of the IBC before NCLT Kolkata Bench, seeking initiation of CIRP against the Corporate Debtor.

The NCLT Bench observed that Sections 140 and 141 of the Indian Contracts Act, 1872 talks 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”

It was further observed that Section 140 of the Indian Contracts Act, 1872 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 invested with all rights of the Creditor. Therefore, under the provisions of the Indian Contract Act, 1872, all the rights of the then Creditor i.e., the Indian Bank, would automatically become the rights of the Surety (Financial Creditor).

On the issue of absence of any agreement between Corporate Debtor and Financial Creditor, it was held that:

“Any agreement of guarantee between 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. 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.”

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