Article

Reimbursement; Subrogation

Note:

First and second lenders opened a syndicated term loan facility of RM30,000,000 for the applicant. In consideration, the applicant pledged 4,050,000 shares of Supreme Finance (M) Bhd stock to the second lender who subsequently transferred the shares to a third person. The applicant attempted to pledge another 4,050,000 shares to the second lender, but the Minister of Finance refused the necessary consent. In order to provide the required collateral, the applicant subsequently applied for an LC from the issuer, naming the first lender as beneficiary. To assure repayment of the issuer, a guarantor executed a letter of indemnity and counter-guarantee in favor of the issuer.

There was a default on the loan facility, and the first lender demanded payment from the issuer for the amount stated on the LC. Issuer honored and informed the beneficiary that, under the terms of the indemnity and counter-guarantee agreement, it "now stood in the position of a surety and as such was entitled to the shares subjected to the first and second [lenders'] rights against [the third party]." Under the counter-guarantee in favor of the issuer, the guarantor was obligated to transfer the stock to the issuer upon payment of the LC . However, the 4,050,000 shares were not given to the issuer until five years later when a court ordered their transfer.

Regarding the letter of indemnity and counter-guarantee, the court found that the issuer was entitled to rights as a subrogatee to the rights of the applicant against the lenders when it paid under the LC under the express terms of the reimbursement agreement. Acting as a subrogatee and in the position of a surety, the issuer was therefore entitled to the shares and any dividends paid and entitled to any of the legal rights of the guarantor in seeking a court order for the shares of stock. The court of appeal stated that, "[Cases] in which, without any such contract of suretyship, there is a primary and a secondary liability of two persons for one and the same debt, the debt being, as between the two, that of one of those persons only, and not equally of both, so that the other, if he should be compelled to pay it, would be entitled to reimbursement from the person by whom (as between the two) it ought to have been paid." The court concluded that the issuer was entitled to subrogation rights for which it was placed in a position of surety and "became the main creditor". The court also determined that because issuer was entitled to the shares, it was entitled to stock dividends and interest from the appropriate date that transfer should have been offered.

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