In this blog post, we will elaborate on the legal concepts of recourse and subrogation. Both subrogation and recourse refer to the possibility of internal recourse against a co-debtor. There must be joint and several liability before internal recourse against the co-debtor is possible and therefore before both subrogation and recourse come into the picture.
Indeed, the cases in question are those where A owes a debt to B. A and C have a mutual relationship from which joint and several liability follows. B tries to collect the debt from A, but without success. B then moves to C for payment of the debt. C is obliged to repay the debt by virtue of joint and several liability. Fortunately, C does now have the right to seek redress internally, through recourse and subrogation.
Joint and several liability
As briefly illustrated above, joint and several liability means that a person can be personally forced to fulfil an obligation of another. Perhaps there are even several debtors. One person can be sued to honour the debts. You may wonder why a natural person would opt for joint and several liability now that there is a risk of a creditor asking you to pay the debt. In practice, however, joint and several liability occurs regularly. For example, all partners of a general partnership (vof) are jointly and severally liable for debts of the vof. When you are sued by a creditor, being a partner of the vof, you have to pay the creditor's claim.
This sounds unfair. So the legislator offers the debtor who has paid the claim the possibility of recourse against the other debtors. This is best illustrated with an example. The general partnership has three partners and a debt of €9,000 with a creditor. As the partners are jointly and severally liable, the creditor can choose from whom to recover the debt. The creditor is likely to recover the debt from the partner with the most assets. The partner pays the full debt of €9,000. In turn, this partner can then distribute the debt to his two co-partners through recourse.
This is therefore a situation where a third party is jointly and severally liable for a claim of the creditor against the original debtor. By virtue of his joint and several liability, the joint and several co-debtor will pay the debts of the other and thus becomes a creditor towards his former co-debtor. At that point, there are two things the new creditor can do (I) seek recourse against the debtors, or (II) subrogate in the claim.
Recourse
After the co-debtor has settled the claim, a recourse claim arises against the other debtors according to Article 6:10 of the Civil Code. Joint and several debtors are each liable for the proportional part of the debt that concerns them. Returning to the partnership example, this means that partner A has a recourse claim against partners B and C worth €6,000. This is because there are three partners who are jointly and severally liable. Thus, each partner would have to contribute €3,000 to the satisfaction of the entire claim. For the sake of completeness, I argue that here, additional costs, such as statutory interest and other costs incurred to satisfy the claim, may also be set off between the debtors.
Subrogation
The second recourse concerns subrogation. Here, the co-debtor takes over the claim in full, so to speak. The creditor's rights vis-à-vis the co-debtors and third parties by virtue of subrogation are transferred to that debtor in respect of this excess, in each case up to a maximum of the portion that concerns the co-debtor or the third party in his relationship with that debtor.
The differences
These two recourse options seem the same. However, there are two major differences. First, subrogation takes place only for the satisfaction of the debt. This means that the costs (incurred for the recovery) are not included in the subrogation. Whereas with recourse one is entitled to statutory interest and the additional costs of recovery, with subrogation one is not entitled to these additional costs. Thus, recourse seems to fill out the recovery possibility more completely.
The second major difference concerns the assumption of the claim. As stated, the entire claim is subrogated. This means that, for example, security rights are also transferred to the co-debtor. This is particularly advantageous if it turns out that the debtor has no liquid assets to settle the claim and another form of recourse will therefore be sought.
Imagine again the general partnership with partners A, B and C. A satisfies the claim worth €9,000 to the creditor. A is aware of the financial position and knows that B can repay the claim of €3,000. Towards him, the recourse claim remains now that he knows that the entire claim, i.e. with additional costs, can be paid.
C has financial difficulties and cannot settle the €3,000 claim. A subrogates in the rights of the former creditor. In this way, A has more security regarding the payment of the claim, as he acquires ancillary rights through subrogation.
In short, subrogation enters into the rights of the creditor. All rights that the creditor had against the debtor are taken over by the partner upon payment of the debt. This means that securities such as pledge and mortgage are transferred along with the debt. For now, we will leave aside the more favourable recourse due to these securities.
In addition, subrogation often occurs with insurance companies. For example, in the case of a car accident. The damage is then compensated by the non-life insurance company. The insurance company makes a payment and in return takes over the claim against the perpetrator. This is a form of subrogation. The insurance company has taken over the entire claim, with all associated rights and obligations.
Conclusion
Recourse and subrogation are two forms of recourse in an internal legal relationship, such as joint and several liability. The advantage of recourse is that one is entitled to payment of the claim and additional costs. The disadvantage is that in the case of a debtor without assets, one will not be able to satisfy the claim. For this reason, there is the second recourse: subrogation. With subrogation, one can rely on the security rights and the resulting benefits associated with the claim. This way, one can hope to still recover the entire claim.
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