Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited vs Axis Bank Limited etc. etc.

Sections 5(7), 5(8), 7, 43, 45 and 66 – Corporate insolvency resolution process against corporate-debtor company – The claim of lenders of the holding Company of corporate-debtor for being recognized as financial creditors of the corporate-debtor on the strength of transactions whereby the corporate-debtor had mortgaged its properties as collateral securities for the loan to the holding company of the corporate-debtor – The claim rejected by Interim Resolution Professional (IRP) – Application by IRP seeking avoidance of the mortgage transactions as being preferential, undervalued and fraudulent u/ss. 43, 45 and 46 – National Company Law Tribunal (NCLT) allowed the application of IRP – Appellate Tribunal (NCLAT) set aside the order of NCLT – Appeal to Supreme Court – Held: If a transaction entered into by a corporate-debtor is not falling in either of the exceptions provided in sub-section (3) of s. 43, and satisfies the threefold requirements of sub-sections (2) and (4) thereof, it would be deemed to be a preference during a relevant time, whether or not, it were so and whether or not it were intended or anticipated to be so – The transactions in question were of deemed preference to related party during the look-back period of two years – The transactions also cannot be said to have been done in the ordinary course of business and hence are not excepted transfers in terms of sub-section (3) – Thus, the transactions are hit by s. 43 – The questions as to whether the transactions were undervalued or fraudulent in terms of ss. 45 and 66, are left open – For a debt to become ‘financial debt’, the basic elements are that it ought to be a disbursal against the consideration for time value of money – Therefore, for a person to be designated as ‘financial creditor’ of the corporate-debtor, the corporate-debtor needs to owe a financial debt to such person – Thus, a third party to whom the corporate-debtor does not owe a ‘financial debt’ cannot become its ‘financial creditor’ for the purpose of insolvency and liquidation process of corporate persons – In the present case, the mortgage transactions in questions since were neither towards any loan, facility or advance to the corporate-debtor nor towards protecting any facility or security of the corporate-debtor, the lenders of the holding company of the corporate-debtor, may fall in the category of ‘secured creditors’, but not in the category of ‘financial creditors’ within meaning of s. 5(8) – Therefore the claim of the lenders of holding company rightly rejected by IRP.

Interpretation of Statutes:

Definition clause – Interpretation of – Where a word is defined to ‘mean’ something, the definition is prima facie restrictive – Where the word defined is declared to ‘include’ something more, the definition is prima facie extensive.

Mortgage Re-mortgage – Legality of – Held: There is no concept of remortgage – On release by mortgagee, a mortgage ceases to exist – The so-called re-mortgage can only be regarded as fresh mortgage.

Judgment:

Observations in a judgment are required to be read in the context in which they appear.

Words and Phrases:

Expressions ‘financial debt’ ‘financial creditors’, ‘operational creditor’, ‘secured creditor’ and ‘unsecured creditor’ – Meaning of in the context of Insolvency and Bankruptcy Code, 2016. Allowing the appeals, the Court

HELD: 1.1. The Insolvency and Bankruptcy Code, 2016 came to be enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons and even of partnership firms and individuals in a time bound manner; the objectives, inter alia, being for maximisation of value of assets of such persons and balance of interest of all the stakeholders. [Para 16.1][356-C]

Swiss Ribbons Private Limited and Anr. v. Union of India and Ors.: (2019) 4 SCC 17 : [2019] 3 SCR 535 – referred to.

1.2 Though the provisions relating to ‘preferential transactions and relevant time’ (in Section 43 of the Code) occur in Chapter III of Part II, relating to liquidation process, but such provisions being for avoidance of certain transactions and having bearing on the resolution process too, by their very nature, equally operate over the corporate insolvency resolution process (CIRP), and hence, the resolution professional is obligated, by virtue of clause (j) of sub-section (2) of Section 25 of the Code, to file application for avoidance of the stated transactions in accordance with Chapter III. That being the position, Section 43 of the Code comes into full effect in CIRP too. [Para 16.3][358-F-H]

2.1 The basic concept of ‘preference’ as per the law dictionaries and lexicons is the act of ‘paying or securing to one or more of his creditors, by an insolvent debtor, the whole or part of their claims, to the exclusion of the rest’. Various jurisdictions have defined, described and dealt with ‘preferential transfer’ as being the transaction where an insolvent debtor makes transfer to or for the benefit of a creditor so that such beneficiary would receive more than what it would have otherwise received through the distribution of bankruptcy estate. Section 547 of US Bankruptcy Code provides for the circumstances in which a bankruptcy trustee may, for the benefit of the estate in question, recover a preferential transfer from the transferee. Section 239 of the UK Insolvency Act, 1986 also provides for the same measures for avoidance of preference given to any person at the relevant time. The time factor also plays a crucial role in such measures of avoidance. This ‘relevant time’ for the purpose of avoidance of preferential transactions is now commonly referred to as the ‘look-back’ period. Significantly, when the preferential transaction is with an unconnected party, the look-back period is comparatively lesser than that of the transaction with a connected party, who is referred to as ‘insider’ or ‘related party’. [Paras 17.1 and 17.2][359-B; 360-C-F]

Advanced Law Lexicon by P. Ramanatha Aiyar (5th Ed.Vol 3, p.4002) – referred to.

2.2. The provisions contained in Section 43 of the Code, however, indicate the intention of legislature that when a transaction falls within the co-ordinates defined therein, the same shall be deemed to be a preference given at a relevant time and shall not be countenanced. Therefore, intent may not be of a defence or support of any preferential transaction that falls within the ambit of Section 43 of the Code. [Para 17.4][362-A-B] UNCITRAL Legislative Guide on Insolvency Law – referred to.

3.1 The consequences of offending preferential transaction are, obviously, drastic and practically operate towards annulling the effect of such transaction. These provisions need to be strictly construed. However, even if Section 43 of the Code is strictly construed, the underlying principles and the object cannot be lost sight of. In other words, the construction has to be such that leads towards achieving the object of these provisions. [Para 18][364-E-G]

Devinder Singh & Ors v. State of Punjab & Ors: (2008)

1 SCC 728 : [2007] 11 SCR 475; Nareshbhai v. Union of India (2019) SCC Online SC 1027 – referred to.

3.2 If twin conditions specified in sub-section (2) of Section

43 are satisfied, the transaction would be deemed to be of preference. As per clause (a) of sub-section (2) of Section 43, the transaction, of transfer of property or an interest thereof of the corporate debtor, ought to be for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and as per clause (b) thereof, such transfer ought to be of the effect of putting such creditor or surety or guarantor in beneficial position than it would have been in the event of distribution of assets under Section 53 of the case. [Para 18.1][365-B-C]

3.3 However, merely giving of the preference and putting the beneficiary in a better position is not enough. For a preference to become an offending one for the purpose of Section 43 of the Code, another essential and rather prime requirement is to be satisfied that such event, of giving preference, ought to have happened within and during the specified time, referred to as “relevant time”. The relevant time is reckoned, as per subsection (4) of Section 43 of the Code, in two ways: (a) if the preference is given to a related party (other than an employee), the relevant time is a period of two years preceding the insolvency commencement date. [Para 18.2][365-D-E]

3.4 However, even if a transaction of transfer otherwise answers to and comes within the scope of sub-sections (4) and

(2) of Section 43 of the Code, it may yet remain outside the ambit of sub-section (2) because of the exclusion provided in sub-section

(3) of Section 43. Such exclusion is provided to: (a) a transfer made in the ordinary course of business or financial affairs of the corporate debtor or transferee; (b) a transfer creating security interest in a property acquired by the corporate debtor to the extent that such security interest secures new value and was given at the time specified in sub-clause (i) of clause (b) of Section 43(3) and subject to fulfilment of other requirements of sub-clause

(ii) thereof. The meaning of the expression “new value” has also been explained in this provision. [Paras 18.3 and 18.4][365-G; 366-A-C]

3.5 By way of these statutory provisions, legal fictions are created whereby preference is deemed to have been given; and is deemed to have been given at a relevant time, if the stated requirements are satisfied. The word ‘deemed’ in essence, is to deem what may or may not be in reality, thereby requiring the subject-matter to be treated as if real. Applying the principles to the provision in Section 43 of the Code, it could reasonably be concluded that any transaction that answers to the descriptions contained in sub-sections (4) and (2) is presumed to be a preferential transaction at a relevant time, even though it may not be so in reality. In other words, since sub-sections (4) and (2) are deeming provisions, upon existence of the ingredients stated therein, the legal fiction would come into play; and such transaction entered into by a corporate debtor would be regarded as preferential transaction with the attendant consequences as per Section 44 of the Code, irrespective whether the transaction was in fact intended or even anticipated to be so. [Paras 19.2 and 19.3][367-A; 369-G-H; 370-A-C]

Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors.: (2019) 8 SCC 416 : [2019] 10 SCR 381; Hindustan Cooperative Housing Building Society Limited v. Registrar, Cooperative Societies and Anr. (2009) 14 SCC 302 : [2009] 2 SCR 331 - relied on.

3.6 Thus, if a transaction entered into by a corporate debtor is not falling in either of the exceptions provided by sub-section

(3) and satisfies the three-fold requirements of sub-sections (4) and (2) of Section 43 of the Code, it would be deemed to be a preference during a relevant time, whether or not in fact it were so; and whether or not it were intended or anticipated to be so. [Para 19.5][370-E-F]

3.7 In order to find as to whether a transaction, of transfer of property or an interest thereof of the corporate debtor, falls squarely within the ambit of Section 43 of the Code, ordinarily, the following questions shall have to be examined in a given case: (I) As to whether such transfer is for the benefit of a creditor or a surety or a guarantor? (ii) As to whether such transfer is for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor? (iii) As to whether such transfer has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53? (iv) If such transfer had been for the benefit of a related party (other than an employee), as to whether the same was made during the period of two years preceding the insolvency commencement date; and if such transfer had been for the benefit of an unrelated party, as to whether the same was made during the period of one year preceding the insolvency commencement date? (v) As to whether such transfer is not an excluded transaction in terms of sub-section (3) of Section 43? [Para 20][370-F-G; 371-A-D]

3.8 09.08.2017 is the insolvency commencement date in the present case. The transactions in question, even if of putting the concerned properties under mortgage with the lenders, carry the ultimate effect of working towards the benefit and advantage of the borrower i.e., the holding company who obtained loans and finances by virtue of such transactions. It is true that there had not been any creditor-debtor relationship between the lender banks and corporate debtor but that will not be decisive of the question of the ultimate beneficiary of these transactions. The mortgage deeds in question, entered by the corporate debtor to secure the debts of its holding company obviously, amount to creation of security interest to the benefit of the holding company. [Para 22.2.1][373-D-F]

3.9 The corporate debtor owed antecedent financial debts as also operational debts and other liabilities towards the holding company . This puts the holding company in such capacity that it is a related party to the corporate debtor and is a creditor as also its surety. In this scenario there is nothing to doubt that the corporate debtor has given a preference by way of the mortgage transactions in question for the benefit of its related person i.e. its holding company (who has been the creditor as also surety for the corporate debtor) for and on account of antecedent financial debts, operational debts and other liabilities owed to such related person. In the given fact situation, it is plain and clear that the transactions in question meet with all the requirements of clause

(a) of sub-section (2) of Section 43. [Paras 22.2.2 and 22.3][374A-C]

3.10 In the given scenario, the requirements of clause (b) of sub-section (2) of Section 43 are also met fair and square. By way of the impugned transfers, the holding company is put in a much beneficial position than it would have been in the absence of such transfers vis-à-vis other creditors. The applicability of clauses (a) and (b) of sub-section (2) of Section 43 of the Code is clear and complete in relation to the impugned six transactions. [Para 22.4][374-D-E; 375-A]

4.1 Even when all the requirements of sub-section (2) of Section 43 of the Code are satisfied, in order to fall within the mischief sought to be remedied by Section 43, the questioned preference ought to have been given at a relevant time i.e. within the period specified in sub-section (4) of Section 43. The extent of ‘relevant time’ is different with reference to the relationship of the beneficiary with the corporate debtor inasmuch as, for the persons falling within the expression ‘related party’ within the meaning of Section 5 (24) of the Code, such period is of two years before the insolvency commencement date whereas it is one year in relation to the person other than a related party. [Para 23][375DF]

4.2. The scheme of the Code is to disapprove and disregard such preferential transaction which falls within the ambit of Section

43 and to ensure that any property likely to have been lost due to such transaction is brought back to the corporate debtor; and if any encumbrance is created, to remove such encumbrance so as to bring the corporate debtor back on its wheels or in other event (of liquidation), to ensure pro rata, equitable and just distribution of its assets. The provisions contained in Section 43, however, indicate the intention of legislature that when a preference is given at a relevant time and thereby, the beneficiary of preference acquires unwarranted better position in the event of distribution of assets, the same may not be countenanced. Looking to the scheme of the Code and the principles applicable for the conduct of the affairs of a corporate person, it cannot be said that anything of a new liability has been imposed or a new right has been created. Maximisation of value of assets of corporate persons and balancing the interests of all the stakeholders being the objectives of the Code, the provisions therein need to be given fuller effect in conformity with the intention of the legislature. [Para 23.1.1][376-F-G; 377-C-E]

Purbanchal Cables & Conductors Pvt. Ltd. & Ors v. Assam State Electricity Board & Ors. (2012) 7 SCC 462 : [2012] 6 SCR 905 — distinguished.

4.3 By virtue of proviso to sub-section (3) of Section 1 of the Code, different dates can be provided for enforcement of different provisions of the Code; and in fact, different provisions have been brought into effect on different dates. However, after coming into force of the provisions, if a look-back period is provided for the purpose of any particular enquiry, it cannot be said that the operation of the provision itself would remain in hibernation until such look-back period from the date of commencement of the provision comes to an end. There is nothing in the Code to indicate that any provision in Chapter II or Chapter III be taken out and put in operation at a later date than the date notified. [Para 23.1.2][377-F-H; 378-A]

4.4. The preference was given to the holding company who was a related party of the corporate debtor. Hence, the lookback period is two years preceding insolvency commencement date i.e., 09.08.2017 per clause (a) of sub-section (4) of Section 43; and accordingly, the point of enquiry would be as to whether the preference had been given during the period of two years preceding 09.08.2017. Therefore, the transactions commencing from 10.08.2015 until the date of insolvency commencement shall fall under the scanner. [Para 24][378-B-C]

4.5 The plea that most of the impugned transactions were not of creation of any new encumbrance by the corporate debtor and in fact, the transaction in respect of the 5 properties in question had been of so-called re-mortgage/s cannot be accepted. In the first place, on release by the mortgagee, the mortgage ceases to exist and it is difficult to countenance the concept of a so-called re-mortgage. The so-called re-mortgage, on all its legal effects and connotations, could only be regarded as a fresh mortgage; and it obviously befalls on the mortgagor to consider at the time of creating any fresh mortgage as whether such a transaction is expedient and whether it should be entered into at all. [Para 24.3.1.][379-C-E]

4.6 Thus, the transactions in question had been of deemed preference to related party i.e. the holding company by the corporate debtor during the look-back period of two years and have rightly been held covered within the period envisaged by sub-section (4) of Section 43 of the Code. [Para 24.5][381-B-C] IDBI Bank Ltd. v. The Administrator, Kothari Orient Finance Ltd., the Official Liquidator & S. Ramaiah : (2009) 152 Comp Case 282 (Mad); Monarch

Enterprises v. Kishan Tulpule & Ors : (1992) 74 Comp Case 89 (Bom) – distinguished.

5.1 In the scheme of provisions contained in s. 43 of the Code, the underlying concept is to disregard and practically annul such transactions which appear, in the course of insolvency resolution or liquidation, to be preferential so as to minimise the potential loss to other stakeholders in the affairs of the corporate debtor, particularly its creditors. What is to be examined for the purpose of Section 43 is the conduct and affairs of the corporate debtor. If the beneficiary of the transaction in question is a related party of the corporate debtor, the period of enquiry is enlarged to two years whereas this period is one year in other cases. During such scanning, by virtue of sub-section (3) of Section 43, two types of transfers are kept out of the purview of sub-section (2), which would not be treated as preference. [Para 25.2][382-C-E]

5.2 The whole of conspectus of sub-section (3) is that only if any transfer is found to have been made by the corporate debtor, either in the ordinary course of its business or financial affairs or in the process of acquiring any enhancement in its value or worth, that might be considered as having been done without any tinge of favour to any person in preference to others and thus, might stand excluded from the purview of being preferential, subject to fulfilment of other requirements of sub-section (3) of Section 43. [Para 25.2.2][383-C-D]

5.3 If the transfer is examined with reference to the ordinary course of business or financial affairs of the transferee alone, it may conveniently get excluded from the rigour of sub-section (2) of Section 43, even if not standing within the scope of ordinary course of business or financial affairs of the corporate debtor. Such had never been the scheme of the Code nor the intent of Section 43 thereof. For the purpose of exception under clause

(a) of sub-section (3) of Section 43, the intent of legislature is required to be kept in view. If the ordinary course of business or financial affairs of the transferee (lenders of the holding company in the present case) would itself be decisive for exclusion, almost every transfer made to the transferees like the lender-banks/financial institutions would be taken out of the net, which would practically result in frustrating the provision itself. [Para 25.3][383-D-F]

5.4 It remains trite that an interpretation that defeats the scheme, intent and object of the statutory provision is to be eschewed and for that matter, if necessary, by applying the principles of purposive interpretation rather than literal. Well known cannons of construction of statutes permit the Court to read the word “or” as “and” after looking at the clear intention of the legislature. The contents of clause (a) of sub-section (3) of Section 43 call for purposive interpretation so as to ensure that the provision operates in sync with the intention of legislature and achieves the avowed objectives. Therefore, the expression “or”, appearing as disjunctive between the expressions “corporate debtor” and “transferee”, ought to be read as “and”; so as to be conjunctive of the two expressions i.e., “corporate debtor” and “transferee”. Thus read, clause (a) of sub-section

(3) of Section 43 shall mean that, for the purposes of sub-section (2), a preference shall not include the transfer made in the ordinary course of the business or financial affairs of the corporate debtor and the transferee. Only by way of such reading of “or” as “and”, it could be ensured that the principal focus of the enquiry on dealings and affairs of the corporate debtor is not distracted and remains on its trajectory, so as to reach to the final answer of the core question as to whether corporate debtor has done anything which falls foul of its corporate responsibilities. [Paras 25.4 and 25.5][383-G-H; 384-A; 384-D-G]

State of Bombay v. R.M.D. Chamarbaugwala and Anr. [1957] SCR 874 – followed.

Mazagaon Dock Ltd v. Commissioner of Income-Tax and Excess Profits Tax [1959] SCR 848 – relied on.

5.5 Even when furnishing a security may be one of normal business practices, it would become a part of ‘ordinary course of business’ of a particular corporate entity only if it falls in place as part of ‘the undistinguished common flow of business done’; and is not arising out of ‘any special or particular situation’. An activity could be regarded as ‘business’ if there is a course of dealings,which are either actually continued or contemplated to be continued with a profit motive. [Paras 25.6.1 and 25.6.2][385-BC; 386-A-B] State of Andhra Pradesh v. H. Abdul Bakshi and Bros. 1964 STC 644; Downs Distributing Co Pty Ltd v. Associated Blue Star Stores Pty Ltd (in liq) (1948) 76 CLR 463; Macquarie Bank Ltd. v. Shilpi Cable

Technologies Ltd. (2018) 2 SCC 674: [2017] 13 SCR

751 – referred to.

5.6 Though it can be assumed that the transactions in question were entered in the ordinary course of business of bankers and financial institutions like the present respondents but on the given set of facts, there is no doubt that the impugned transactions do not fall within the ordinary course of business of the corporate debtor. The corporate debtor had been promoted as a special purpose vehicle by its holding company. It is difficult to even surmise that the business of the corporate debtor, of ensuring execution of the works assigned to its holding company and for execution of housing/building projects, in its ordinary course, had inflated itself to the extent of routinely mortgaging its assets and/or inventories to secure the debts of its holding company. It had also not been the ordinary course of financial affairs of the corporate debtor that it would create encumbrances over its properties to secure the debts of its holding company. The ordinary course of business or financial affairs of the corporate debtor cannot be taken to be that of providing mortgages to secure the loans and facilities obtained by its holding company; and that too at the cost of its own financial health. [Para 25.6.2][386-B-E]

5.7 The impugned transactions had not been in the ordinary course of business or financial affairs of the corporate debtor. The impugned transactions are not of excepted transfers in terms of sub-section (3) of Section 43 of the Code. [Paras 25.7 and 25.8][387-B-C]

Keshavlal Khemchand & Sons Pvt. Ltd. & Ors v. Union of India & Ors: (2015) 4 SCC 770 : [2015] 2 SCR 51; State Bank of India v. Jah Developers Pvt. Ltd. & Ors.: (2019) 6 SCC 787 : [2019] 7 SCR 701 – held

inapplicable.

6. In the ordinary course of business, when the bankers or financial institutions examine any proposal for loan or advance or akin facility, they are supposed to, and they indeed, take up the exercise commonly termed as ‘due diligence’ so as to study the viability of the proposed enterprise as also to ensure, inter alia, that the security against such loan/advance/facility is genuine and adequate; and would be available for enforcement at any point of time. Given the nature of transaction, the lenders must prefer a clean security to justify the transaction as being in the ordinary course of their business. In the same exercise, in the ordinary course of their business, if they are at all entering into a transaction whereby a third party security, including that of a subsidiary company, is to be taken as collateral, they are obliged to undertake further due diligence so as to ensure that such third party security is a prudent and viable one and is not likely to be hit by any law. In that sequence, they remain under obligation to assure themselves that such third party whose security is being taken, is not already indebted or in red and is not likely to fail in dealing with its own indebtedness. In the context of the Code, such requirement is moreover imperative on a bare look at the provisions contained in Part II thereof. On the facts of the present case that in fact, several of the respondent lenders are shown to be the direct creditors of the corporate debtor too, to the extent of the advances made to the corporate debtor, they and the corespondents cannot plead ignorance about the actual state of affairs and financial position of the corporate debtor. Despite such knowledge, if they chose to take the business risk of accepting security from the corporate debtor and that too, for securing the loans/advances/facilities made over to the holding company, who was a directly related party for being its holding company, they themselves remain responsible for present legal consequences. [Para 26.1][387-E-F; 388-A-D]

Advanced Law Lexicon by P. Ramanatha Aiyar –

referred to.

7. The transactions in question are hit by Section 43 of the Code and the Adjudicating Authority, having rightly held so, had been justified in issuing necessary directions in terms of Section

44 of the Code in relation to the transactions concerning Property Nos. 1 to 6. NCLAT, had not been right in interfering with the well-considered and justified order passed by NCLT in this regard. [Para 27][388-E]

8. Having approved the order passed by NCLT as regards the aspect of the transactions being preferential, the Court does not consider it necessary to deal with the questions as to whether the transactions are undervalued and/or fraudulent too. In the totality of circumstances, the said questions are left at that only, while also leaving all the related questions of law open; to be examined in an appropriate case. [Para 29][391-A-C]

9. In the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. The arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. The scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority. It would also have been appropriate for NCLT to deal with all these aspects separately and distinctively, rather than giving a combined findings on all these three aspects that the impugned transactions were preferential, undervalued and fraudulent. [Para 29.1, 29.2][391-C-D; G-H; 392-A-C]

10.1 In the Code, the significant expressions “financial creditor” and “financial debt” have been defined with the words “means” and “includes”. The law remains settled that where a word is defined to ‘mean’ something, the definition is prime facie restrictive and exhaustive. On the other hand, where the word defined is declared to ‘include’ something more, the definition is prima facie extensive. However, a little difficulty arises when the definition contains both the words ‘means’ and ‘includes’. [Para 42][422-H; 423-A-B]

P. Kasilingam & Ors. v. P.S.G. College of Technology & Ors. (1995) Suppl. 2 SCC 348 : [1995] 2 SCR 1061; Krishi Utapadan Mandi Samiti & Anr v. M/s Shankar Industries & Ors. (1993) Suppl. 3 SCC 361 : [1993] 1 SCR 1037; Delhi Development Authority v. Bhola Nath Sharma (Dead) by LRs & Ors. (2011) 2 SCC 54; Black Diamond Beverages & Anr. v. Commercial Tax Office, Central Section, Assessment Wing, Calcutta & Ors. (1998) 1 SCC 458 : [1997] 4 Suppl. SCR 133 – referred to.

10.2 For a debt to become ‘financial debt’ for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in sub-clauses (a) to (f) of Section 5(8); it may also include any derivative transaction or counterindemnity obligation as per sub-clauses (g) and (h) of Section 5(8); and it may also be the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h). The requirement of existence of a debt, which is disbursed against the consideration for the time value of money remains an essential part even in respect of any of the transactions/dealings stated in sub-clauses (a) to (i) of Section 5(8), even if it is not necessarily stated therein. In any case, the definition, by its very frame, cannot be read so expansive, rather infinitely wide, that the root requirements of ‘disbursement’ against ‘the consideration for the time value of money’ could be forsaken in the manner that any transaction could stand alone to become a financial debt. In other words, any of the transactions stated in the said sub-clauses (a) to (i) of Section 5(8) would be falling within the ambit of ‘financial debt’ only if it carries the essential elements stated in the principal clause or at least has the features which could be traced to such essential elements in the principal clause. The essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as ‘financial debt’ within the meaning of Section 5(8) of the Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money. [Para 43][427-E-H; 428-A-C]

10.3 The root requirement for a creditor to become financial creditor for the purpose of Part II of the Code, there must be a financial debt which is owed to that person. He may be the principal creditor to whom the financial debt is owed or he may be an assignee in terms of extended meaning of this definition but, and nevertheless, the requirement of existence of a debt being owed is not forsaken. [Para 44][428-D]

10.4 Therefore, for a person to be designated as a financial creditor of the corporate debtor, it has to be shown that the corporate debtor owes a financial debt to such person. Understood this way, it becomes clear that a third party to whom the corporate debtor does not owe a financial debt cannot become its financial creditor for the purpose of Part II of the Code. [Para 45][428-EF]

10.5 The peculiar elements of the expressions “financial creditor” and “financial debt”, as occurring in Sections 5(7) and 5(8), when visualised and compared with the generic expressions “creditor” and “debt” respectively, as occurring in Sections 3(10) and 3(11) of the Code, the scheme of things envisaged by the Code becomes clearer. The generic term “creditor” is defined to mean any person to whom the debt is owed and then, it has also been made clear that it includes a ‘financial creditor’, a ‘secured creditor’, an ‘unsecured creditor’, an ‘operational creditor’, and a ‘decree-holder’. Similarly, a “debt” means a liability or obligation in respect of a claim which is due from any person and this expression has also been given an extended meaning to include a ‘financial debt’ and an ‘operational debt’. [Para 46][428-F-H; 429-A]

10.6 The use of the expression “means and includes” in these clauses makes it clear that for a person to become a creditor, there has to be a debt i.e., a liability or obligation in respect of a claim which may be due from any person. A “secured creditor” in terms of Section 3(30) means a creditor in whose favour a security interest is created; and “security interest”, in terms of Section 3(31), means a right, title or interest or claim of property created in favour of or provided for a secured creditor by a transaction which secures payment for the purpose of an obligation and it includes, amongst others, a mortgage. Thus, any mortgage created in favour of a creditor leads to a security interest being created and thereby, the creditor becomes a secured creditor. [Para 46.1][429-A-C]

10.7 However, when all the defining clauses are read together and harmoniously, it is clear that the legislature has maintained a distinction amongst the expressions ‘financial creditor’, ‘operational creditor’, ‘secured creditor’ and ‘unsecured creditor’. Every secured creditor would be a creditor; and every financial creditor would also be a creditor but every secured creditor may not be a financial creditor. The expressions “financial debt” and “financial creditor”, having their specific and distinct connotations and roles in insolvency and liquidation process of corporate persons, have only been defined in Part II whereas the expressions “secured creditor” and “security interest” are defined in Part I. [Para 46.1][429-C-E]

10.8 In the scheme of the IBC, what is intended by the expression ‘financial creditor’ is a person who has direct engagement in the functioning of the corporate debtor; who is involved right from the beginning while assessing the viability of the corporate debtor; who would engage in restructuring of the loan as well as in reorganisation of the corporate debtor’s business when there is financial stress. In other words, the financial creditor, by its own direct involvement in a functional existence of corporate debtor, acquires unique position, who could be entrusted with the task of ensuring the sustenance and growth of the corporate debtor, akin to that of a guardian. In the context of insolvency resolution process, this class of stakeholders namely, financial creditors, is entrusted by the legislature with such a role that it would look forward to ensure that the corporate debtor is rejuvenated and gets back to its wheels with reasonable capacity of repaying its debts and to attend on its other obligations. Protection of the rights of all other stakeholders, including other creditors, would obviously be concomitant of such resurgence of the corporate debtor. [Para 47][429-F-H; 430-A]

10.9 Keeping the objectives of the Code in view, the position and role of a person having only security interest over the assets of the corporate debtor could easily be contrasted with the role of a financial creditor because the former shall have only the interest of realising the value of its security (there being no other stakes involved and least any stake in the corporate debtor’s growth or equitable liquidation) while the latter would, apart from looking at safeguards of its own interests, would also and simultaneously be interested in rejuvenation, revival and growth of the corporate debtor. Thus understood, it is clear that if the former i.e., a person having only security interest over the assets of the corporate debtor is also included as a financial creditor and thereby allowed to have its say in the processes contemplated by Part II of the Code, the growth and revival of the corporate debtor may be the casualty. Such result would defeat the very objective and purpose of the Code, particularly of the provisions aimed at corporate insolvency resolution. [Para 47.1][430-B-D]

10.10 Therefore, a person having only security interest over the assets of corporate debtor (like the instant third party securities), even if falling within the description of ‘secured creditor’ by virtue of collateral security extended by the corporate debtor, would nevertheless stand outside the sect of ‘financial creditors’ as per the definitions contained in sub-sections (7) and

(8) of Section 5 of the Code. Differently put, if a corporate debtor has given its property in mortgage to secure the debts of a third party, it may lead to a mortgage debt and, therefore, it may fall within the definition of ‘debt’ under Section 3(10) of the Code. However, it would remain a debt alone and cannot partake the character of a ‘financial debt’ within the meaning of Section 5(8) of the Code. [Para 47.2][430-E-G]

10.11 Indisputably, the debts in question are in the form of third party security; said to have been given by the corporate debtor so as to secure the loans/advances/facilities obtained by its holding company from the respondent-lenders. Such a ‘debt’ is not and cannot be a ‘financial debt’ within the meaning of Section 5(8) of the Code; and hence, the respondent-lenders, the mortgagees, are not the ‘financial creditors’ of the corporate debtor. [Para 48][430-G-H; 431-A]

10.12 The lenders of the holding company of the corporate debtor, on the strength of the mortgages in question, may fall in the category of secured creditors, but such mortgages being neither towards any loan, facility or advance to the corporate debtor nor towards protecting any facility or security of the corporate debtor, it cannot be said that the corporate debtor owes them any ‘financial debt’ within the meaning of Section 5(8) of the Code; and hence, such lenders do not fall in the category of the ‘financial creditors’ of the corporate debtor. [Para 54][441C-D] Swiss Ribbons Private Limited and Anr. v. Union of India and Ors.: (2019) 4 SCC 17 : [2019] 3 SCR 535;

Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta (2019) SCC OnLine SC 1478 – distinguished.

Rajkumari Kaushalya Devi v. Bawa Pritam Singh & Anr. AIR 1960 SC 1030 : [1960] SCR 570 – held

inapplicable.

Order dated 13.03.2019 in M.A. No. 1584/2019 in CP No. 402 of 2018 as passed by NCLT (Mumbai Bench) in the case of SREI Infrastructure Finance Limited v. Sterling International Enterprises Ltd – disapproved.

Dr. B.V.S. Lakshmi v. Geometrix Laser Solutions (P) Ltd. Company Appeal (AT) (Insolvency) No. 38 of 2017; Ramchand Sur v. Ishwar Chandra Giri 61 Ind Cases 539; Prithvi Nath Singh & Ors. v. Suraj Ahir & Ors. [1963] 3 SCR 302; State Bank of India v. Samneel Engineering Co. & Ors. 1995 (35) DRJ 485; Dassappa & Ors v. Jogaiah & Ors. (1964) ILR 545; Manik Chand Raut v. Baldeo Chaudhary & Ors. (1949) SCC Online Pat 64; State Bank of India v. Smt. Kusum Vallabhdas Thakkar (1991) SCC Online GUJ 14; Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited (2017) SCC Online NCLAT 859; Pomal Khanji Govindji &

Ors. v. Brajlal Karsandas Purohit & Ors. (1989) 1 SCC

458 : [1988] 3 Suppl. SCR 826; K. Sashidhar v. Indian Overseas Bank and Ors. (2019) SCC OnLine SC 257; Bikram Chatterjee v. Union of India (2019) 8 SCC 527; Haryana Financial Corporation and Anr. v. Jagdamba Oil Mills and Anr. (2002) 3 SCC 496 : [2002] 1 SCR

621 – referred to.

Report of Banking Law Reform Committee; Craise on Statue Law (Seventh Ed.—Indian reprint 1999 page 213; Bankruptcy Law Reforms Committee (February 2015) – referred to.