Surety can Claim Repayment from Co. in Liquidation as a Subrogee u/s 140 of Contract Act if he Paid the Loan as a Guarantor | HC

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Subrogee u/s 140 of Contract Act

Case Details: O.L. of Essen Computers Ltd. v. Apurva J Parekh - [2023] 152 taxmann.com 409 (HC-Gujarat)

Judiciary and Counsel Details

    • A.S. Supehia, J.
    • Abhijit P. Joshi for the Applicant.
    • Saurabh Soparkar, Sr. Adv., Monaal Davawala, Manya Anjaria, B.S. Soparkar, Ms Maithili D. Mehta & Tirth Nayak for the Respondent.

Facts of the Case

In the instant case, Respondent No. 1 was the director of the company in liquidation and stood as guarantor of the company in liquidation. He claimed the amount from the Official Liquidator on the premise that he had paid the amount in the capacity of guarantor of the company in liquidation as subrogation as a secured creditor.

Consequently, the Chartered accountant appointed by Official Liquidator treated Respondent No. 1, as a secured creditor on the basis of settlement letters issued by the secured creditor.

High Court Held

The High Court observed that the expression ‘secured creditor’ in section 529 of the Companies Act, 1956 would mean a person who holds a mortgage, charge or lien on the property of the company or any part thereof as a security for a debt due to him from the company.

Thus, respondent no. 1 had to prove by showing documentary evidence that by paying the loan amount, he had secured the entire debt of the company in liquidation.

However, as per provisions of section 140 read with section 128 of the Indian Contract Act, 1872, where a guaranteed debt has become due, or default of principal debtor to perform a guaranteed duty has taken place, surety, upon payment or performance of all that he is liable for, is invested with all rights which creditor had against the principal debtor.

Therefore, the High Court held that respondent no. 1 could seek repayment as a subrogee in the exercise of his right under section 140 of the Contract Act to the extent he had paid the amount as a guarantor on showing evidence of payment of debt.

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