Subrogation

Indian Contract Act, 1872 — Section 140

The substitution of one creditor for another, allowing the substituted creditor to take over the original creditor's rights against the debtor. In banking, when an ARC purchases NPAs from a bank, it is subrogated to the bank's rights against the borrower. Similarly, if a guarantor pays the bank's dues, the guarantor is subrogated to the bank's rights against the principal borrower.

In practice, subrogation is how rights travel from one creditor to another without the underlying debt being extinguished. Under Section 140 of the Indian Contract Act, 1872, a guarantor who pays the bank's dues steps into the bank's shoes and can pursue the principal borrower for what was paid, including the benefit of any security the bank held. The same logic operates commercially when an Asset Reconstruction Company buys a pool of non-performing assets — the ARC is subrogated to the bank's rights and can continue SARFAESI enforcement, DRT proceedings, and recovery against guarantors as if it were the original lender. The point that matters at the recovery stage is documentation: the assignee or paying guarantor must be able to show an unbroken chain of title to the debt and the security. A poorly drafted assignment or a guarantor who pays without reserving rights can find the subrogation claim contested. Well-advised buyers confirm the assignment chain before initiating enforcement.