Article

Note: When LDV Group (Debtor), a van manufacturer in the English Midlands, experienced chronic cash-flow problems starting in December 2008, its primary creditor, Barclays Bank PLC (Creditor), provided overdraft facilities and equipment finance loans. When Debtor's cash-flow problems worsened to the point where they had to petition for administration, Weststar LDV Sdn Bhd (Weststar), the British Department of Business, Enterprise and Regulatory Reform (Government Agency), and Debtor agreed that Weststar would purchase Debtor. Under this agreement, Creditor agreed to provide interim funding of GBP 2,500,000 to Debtor during the time that Weststar performed due diligence research. Government Agency agreed to guarantee Debtor's liability for the interim funding to Creditor, and Debtor agreed to counter-indemnify Government Agency for all claims from Creditor.

Additionally, Ibrahim (Applicant), the controller of Weststar, obtained a standby LC subject to UCP600 issued by UBS Singapore (Issuer) in favor of Government Agency/Beneficiary. During the course of due diligence research, however, Weststar decided not to acquire Debtor, and as a result, Debtor went into insolvency administration. Creditor then demanded and received payment of GBP 1,400,000 from Government Agency/Beneficiary for the interim financing it had already provided. Government Agency/Beneficiary then drew on the LC which was paid.

After reimbursing Issuer, Applicant sought to share in the administration recoveries from Debtor in place of Government Agency/Beneficiary. Creditor, as the primary creditor of Debtor, sought to limit claims on Debtor and argued that once Issuer paid Government Agency/Beneficiary under the LC, Government Agency/Beneficiary had no further right to share in the recoveries from Debtor's administration.

Applicant sued Creditor and the Secretary of State in the Chancery Division asserting that he was subrogated to the rights of Government Agency/Beneficiary and that Government Agency's/Beneficiary's drawing on the LC did not discharge the debt due to Government Agency/Beneficiary under Debtor's counter indemnity. Justice Vos of the Chancery Division ruled in favor of Creditor, and Applicant appealed to the Court of Appeals, Civil Division. Lord Justice Lewison of the Court of Appeals dismissed Applicant's appeal.

The appellate court found that the only issue on appeal was "whether a debtor's liability to his creditor is discharged when the creditor recovers an equivalent amount to the debt from a bank that has provided a standby letter of credit." The appellate court agreed with Creditor and ruled that "when an issuing bank honours a letter of credit its payment will discharge the obligation that gave rise to the need for the letter of credit." The appellate court reasoned that generally, when an issuer of an LC pays the beneficiary, the legal effect is that the issuer is discharging the obligations of the applicant. Therefore, once Issuer paid Government Agency/Beneficiary the amount of the LC, the counter indemnity debt due to Government Agency/Beneficiary was discharged in full and there were no more rights to subrogate to Applicant.

[JEB/ael]

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