INTRODUCTION
India’s financially challenged business companies are expected to reverse their financial situation faster because of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016[1]. Stakeholders like sureties and personal guarantors, who normally have subrogation rights that enable them to act as creditors once the debtor’s obligations are satisfied, are significant CIRP stakeholders. Considering their financial stability and available recourse, this blog critically analyses the possible effects of abrogating these subrogation rights within the context of the CIRP. Through an examination of the consequences of eliminating or curtailing these rights, the blog delves into the wider implications of the financial risks faced by guarantors, the impartiality and effectiveness of the CIRP procedure, and the general stability of India’s bankruptcy laws. The objective is to provide insights into the implications for law and economy, together with suggestions for practice and policy to ensure a balanced and effective insolvency system in India.
UNDERSTANDING SUBROGATION RIGHTS: DOCTRINE
Definition: A legal mechanism known as subrogation rights enables a surety or guarantor who has paid off a debtor to take over the role and rights of the original creditor. By essentially “stepping into the shoes” of the creditor, this idea enables the surety to get payment from the principal debtor. By allowing the guarantor to seek compensation after the debtor fulfills their commitments, this privilege guarantees that they would not suffer financial loss.
Importance
- Balance between Guarantors and Creditors: Subrogation rights contribute to the preservation of a delicate equilibrium between guarantors and creditors by safeguarding guarantor interests and promoting creditor recovery, therefore assuring equitable treatment for both sides.
- Repayment rights for guarantors: These rights allow guarantors to pursue repayment from the debtor, shielding them from loss of money after the debtor’s obligations are fulfilled.
- Protection Against unjust Penalties: When guarantors meet their duties, subrogation rights safeguard them from unjust penalties, allowing them to get their money back and avoid having to bear unnecessary financial hardships.
- Integrity of Credit Transactions: Subrogation rights safeguard the dependability and integrity of credit transactions by permitting prompt creditor payments and providing guarantors with an equitable opportunity to recoup their investments.
- Minimizing the Disputes: By reducing possible conflicts between guarantors and creditors, these rights help to create a more stable and equitable financial environment.
SUBROGATION AND CIRP: SYNOPSIS
CIRP Framework: Under the Code, CIRP is intended to help India’s struggling business entities resolve their problems quickly. Creditors, debtors, and guarantors work together in an organized manner to handle insolvency-related concerns. A resolution plan is created and submitted for approval by the Committee of Creditors (CoC) once creditors start the process and a resolution professional is assigned to oversee the debtor’s assets[2]. An organized procedure for resolving the claims of different stakeholders is provided by the process, which also attempts to protect the debtor’s assets[3].
Impact on Subrogation Rights: The subrogation rights of sureties and personal guarantors may be strongly affected by corporate insolvency resolution proceedings. After meeting their financial responsibilities, guarantors may pursue recovery from the debtor under subrogation rights. The moratorium imposed under CIRP, however, essentially nullifies the guarantor’s subrogation rights under the IBC as it stops any legal actions against the corporate debtor. The authorization of the resolution plan and the code’s provisions superseding other laws that defer to it further complicate the claim of these rights[4]. and give the IBC’s overriding impact, binding the resolution plan to all stakeholders.
In the case of State Bank of India vs. Shri Ghanshyam Surajbali Kurmi (2022)[5], the National Company Law Tribunal (NCLT), Hyderabad Bench addressed the impact of the CIRP on the subrogation rights of the guarantor. The tribunal held that the CIRP conclusion does not discharge the guarantor from liabilities, reinforcing the Supreme Court’s stance. It emphasized that the guarantor cannot enjoy subrogation rights when making payments for the guaranteed debt. The ruling clarified that the CIRP aims for revival, not recovery, and discharge of the guarantor’s liability only occurs if the creditor voluntarily releases the principal debtor. Consequently, the tribunal initiated the Insolvency Resolution Process against the guarantor.
The case of Lalit Kumar Jain vs. Union of India (2021)[6] concerns an appeal of a notification granting corporate debtors the right to file for bankruptcy under the Insolvency and Bankruptcy Code, 2016 (CIRP), using personal guarantors as collateral. The petitioners contended that subrogation rights were affected by the notification’s creation of conflicting legal frameworks for insolvency proceedings against personal guarantors. The court observed that personal guarantors’ subrogation rights were impacted when the CIRP brought their obligations before the National Company Law Tribunal. The rights of those who are principally accountable for a company’s insolvency but are not included in the resolution process are impacted by CIRP, and this case demonstrates how this impacts subrogation rights.
The case of Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors. (2019)[7] concerned subrogation rights and the effect of the CIRP on the Committee of Creditors of Essar Steel. The personal guarantees made by the promoters became invalid after the debt was settled. The question of whether the NCLAT ruling was still valid was taken up by the Supreme Court. In balancing the interests of all parties, the Court stressed the need for a workable and practical settlement strategy. The argument put out was that the Committee of Creditors’ jurisdiction should not be limited by the CIRP and that the continuation of subrogation rights would be detrimental to the successful resolution applicant.
CRITICAL ANALYSIS
Pros of Abrogation: Abrogating subrogation rights might accelerate the insolvency process by making it simple. It provides a more simplified and effective procedure for resolving insolvency situations by lowering the possibility of post-resolution litigation.
Cons of Abrogation: This strategy may be unfair to guarantors who forfeit their claim to repayment from the primary debtor, thereby putting them at risk of suffering large financial losses. Additionally, it might keep organizations from offering guarantees, which could harm the credit markets and make it more difficult for companies to get the funding they need.
Legal and Ethical Concerns: Legal and moral questions are brought up by the abrogation, especially considering how equitable it is to revoke rights in the absence of a guarantor agreement. To make sure that the insolvency framework does not unfairly harm any party, it is imperative to strike a balance between guarantor responsibilities and creditor recovery[8]. To preserve justice and confidence in the financial and legal institutions, the ethical implications of such measures need to be properly evaluated.
CONCLUSION
Sureties and personal guarantors are heavily impacted by the abrogation of subrogation rights under the Corporate Insolvency Resolution Process (CIRP). It might result in unjust financial losses for guarantors who lose their right to compensation from the primary debtor, even while it streamlines the insolvency procedure and reduces litigation. This may cause certain organizations to be reluctant to offer guarantees, which would hurt the credit market. Crucial in this regard are the legal requirements included in the Code of Insolvency and Bankruptcy. Legislation on insolvency must be fair and protect the interests of all parties, creditors, debtors, and guarantors. To keep guarantors eager to issue guarantees in future financial transactions, they must be treated fairly. Trust between market players is fostered by an equitable and transparent bankruptcy framework, which also supports economic stability. If policymakers want to establish a more equal financial environment, they should consider the legal and moral consequences of abrogating subrogation rights. A stronger and more resilient insolvency system will result from striking a balance between the requirements of guarantors and creditors.
Authors Name: Aashna Chopra & Aryan Durga (University of Petroleum and Energy Studies, Dehradun)
Reference(s):
[1] Insolvency and Bankruptcy Code 2016
[2] Insolvency and Bankruptcy Code 2016, s 6-14
[3] King Stubb & Kasiva, ‘Corporate Insolvency Resolution Process (CIRP): Provisions And Procedures’ (17 March 2023) <https://ksandk.com/insolvency/corporate-insolvency-resolution-process/#:~:text=Responsibility%20for%20taking%20decisions%20in%20relation%20to%20the,corporate%20debtor%20if%20noviable%20resolution%20plan%20is%20found.> accessed on 8 July 2024
[4] Insolvency and Bankruptcy Code 2016, s 14, s 31, s 238
[5] (2022) ibclaw.in 635 NCLT
[6] (2021) 9 SCC 321
[7] (2020) 8 SCC 531
[8] Surendra Naik, ‘Right of Subrogation: Right of Guarantor against Principal Borrower on whose behalf loan is repaid’ (19 February 2022) <https://bankingschool.co.in/loans-and-advances/right-of-subrogation-right-of-guarantor-against-principal-borrower-on-whose-behalf-loan-is-repaid/> accessed 09 July 2024
