Businesses often rely on trade credit insurance to protect themselves from customers’ inability to pay for products or services. An interesting question that arose recently in the Indian insolvency context was that when a creditor’s claim for pending dues is paid out by an insurer, can the creditor, having received such pay-out, maintain an insolvency action against the debtor? The National Company Law Tribunal (“NCLAT”) has answered this in the affirmative.
In the case of Milan Aggarwal Versus Saudi Basic Industries Corporation & Anr.[1], the factual situation before the NCLAT was that a creditor applied for initiation of insolvency proceedings due to the debtor’s default in making payment for products purchased. Notably, at the time when the insolvency action was brought, the creditor (who had insurance coverage for such non-payment) had already received a pay-out from its insurer. The creditor’s application was admitted, and insolvency process was initiated against the debtor, which order came to be challenged before the NCLAT. The debtor claimed that as the creditor had received payment from the insurer, there was no outstanding debt and thus, the insolvency application was not maintainable. It was also contended that the creditor had failed to disclose that it had received payment from the insurer which amounted to fraud and suppression.
Upon considering rival submissions, the NCLAT held that, despite the creditor having received the claim in insurance, the insolvency action against the debtor was maintainable as an insurance policy is a third-party contract between the creditor and insurer, to which the debtor is not privy. Therefore, the debtor could not be released from the consequences of its non-payment on account of such insurance pay-out. Addressing the debtor’s allegations of fraud and suppression, the NCLAT held that the creditor was not bound to disclose the payment received under the insurance policy.
The NCLAT also examined the principle of subrogation to conclude that if a debt has been paid out by the insurer, proceedings for recovery of the same debt can still be initiated by the creditor and the debtor cannot be released on the ground that no debt is payable to the creditor. The NCLAT also noted that pursuant to legal proceedings, when and if the debt is repaid to the creditor, the manner of apportionment of the sum received is a matter between the creditor and its insurance company. Heavy reliance was placed on the findings of the Supreme Court in the case of Economic Transport Organisation Vs Oriental Insurance Company Limited[2], wherein the issue of the insured creditor’s right to pursue recovery after subrogation to the insurer was examined.
Reliance was also placed on judgements of the High Courts of Bombay[3], Delhi[4] and Gujrat[5] whereby the settled principle, subrogation does not extinguish the insured’s right to initiate action against the debtor, was examined. In these judgments, the respective High Courts have held that a contract of insurance is an inter-se matter between the insurer and the insured and therefore, a third party cannot take shelter under the insurance contract and disown its debt on that basis. In such cases, the debtor stands completely outside the insurance contract between the insurer and its insurer.
In view of the NCLAT Order, the judicial position on commencement of insolvency when the debt is paid out in insurance, stands clarified and unless turned by the Supreme Court, the NCLAT judgment would hold the field on this point of law.
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[1] 2023 SCC Online NCLAT 2317
[2] (2010) 4 SCC 114
[3] (2019) (1) MLJ 857
[4] (2018) SCC Online Del 9889
[5] (2005) SCC Online Guj 262
AUTHORS: Smiti Tewari (Partner) | Simran Grover (Associate)