Insolvency and Bankruptcy code, 2016 – ss. 5(7), 5(8), 3 and 60 – Contract Act, 1872 – ss.124, 126 and 172 –L&T Infrastructure Finance company advanced the financial facility to ‘D’ – A facility agreement was executed between ‘D’ (borrower) and L&T Infrastructure Finance company (lender) – Lender advanced to borrower Rs.40 crores – ‘DV’ (corporate debtor) gave an undertaking in favour of L&T Infrastructure Finance to the effect that 100% of their shareholding in GEL shall not be disposed of so long as any amounts were due and payable and outstanding under the financial assistance proposed to be provided by L&T Infra to the borrower –A Pledge agreement was also executed between ‘DV’ and L&T Infrastructure Finance company by which agreement 40,160 shares of GEL were pledged as security –L&T assigned all rights, title and interest in the financial facility including any security, interest in favour of appellant –‘D’(borrower) failed to repay – Bank filed petition u/s.7 of the Code to initiate the corporate resolution process in respect of ‘DV’(corporate debtor) – Pursuant to commencement of CIRP in respect of corporate debtor, the appellant filed its claim for an amount of Rs.83,49,85,667/- with respondent, the Interim Resolution Professional – Respondent opined that the corporate debtor’s liability was restricted to pledge of shares –Appellant filed application before the NCLT – NCLT held that appellant’s status as financial creditor of the corporate debtor is not proved in light of s.5(8) of the Code – NCLAT dismissed the appeal filed by the appellant – On appeal, held: A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default – The present is not case where the corporate debtor has entered into a contract to perform the promise, or discharge the liability of borrower in case of his default – The Pledge Agreement is limited to pledge 40,160 shares as security –The corporate debtor has never promised to discharge the liability of borrower –It was borrower who had promised to repay the loan of Rs.40 crores in Facility Agreement and it was borrower who had undertaken to discharge the liability towards lender – The appellant at best will be a secured debtor qua above security but shall not be a financial creditor within the meaning of s.5 sub-sections (7) and (8) – The appellant is not financial creditor of the corporate debtor – The decision of the Resolution Professional is upheld.
Dismissing the appeal, the Court
HELD : 1.Whether the corporate debtor owed any financial debt to the appellant so as to treat the appellant as financial creditor is the question to be answered. The definition of ‘financial debt’ as contained in Section 5(8) of the 2016 Code contains the expressions “means” and “includes”. The definition begins with the words “financial debt” means ‘a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes’... The main part of the definition, thus, provides that financial debt means a debt “which is disbursed against the consideration for the time value of money”. The definition in the second part gives instances which also includes financial debt. The appellant in his submission has relied on Section 5(8)(i) to support his claim that the appellant is the financial creditor. [Para 21][1054-E-G]
2. It is clear from the definition a contract of guarantee (section 126 of the Indian Contract Act, 1872) is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The present is not a case where the corporate debtor has entered into a contract to perform the promise, or discharge the liability of borrower in case of his default. The Pledge Agreement is limited to pledge 40,160 shares as security. The corporate debtor has never promised to discharge the liability of borrower. The Facility Agreement under which the borrower was bound by the terms and conditions and containing his obligation to repay the loan security for performance are all contained in the Facility Agreement. A contract of guarantee contains a guarantee “to perform the promise or discharge the liability of third person in case of his default”. Thus, key words in Section 126 are contract “to perform the promise”, or “discharge the liability”, of a third person. Both the expressions “perform the promise” or “discharge the liability” relate to “a third person”. The Pledge Agreement dated 10.01.2012 does not contain any contract that the promise which was made by the borrower in the Facility Agreement dated 12.05.2011 to discharge the liability of debt of Rs.40 crores is undertaken by the corporate debtor. It was the borrower who had promised to repay the loan of Rs.40 crores in Facility Agreement dated 12.05.2011 and it was borrower who had undertaken to discharge the liability towards lender. The Pledge Agreement dated 10.01.2012 does not contain any contract that corporate debtor has contracted to perform the promise, or discharge the liability of the third person. The Pledge Agreement is limited to pledge of 40,160 shares of GEL only. This Court has noticed above that in the Facility Agreement there is a Security Creation by way of Schedule IV in which 100% equity shares of GEL were pledged by the borrower and second pari-passu charge on all current assets of the GEL was also created as security for loan. It transpires that since some shares of GEL were also with the corporate debtor who is subsidiary Company of ‘D’. the same was also pledged with the lender as additional security by a subsequent agreement dated 10.01.2012. [Para 23][1055-E-H; 1056-A-C]
5. This Court in Swiss Ribbons (P) Ltd. v. Union of India and Pioneer Urban Land & Infrastructure Ltd. v. Union of India held that a person having only security interest over the assets of corporate debtor, even if falling within the description of ‘secured creditor’ by virtue of collateral security extended by the corporate debtor, would not be covered by the financial creditors as per definitions contained in sub-section (7) and (8) of section 5. What has been held by this Court as noted above is fully attracted in the present case where corporate debtor has only extended a security by pledging 40,160 shares of GEL. The appellant at best will be secured debtor qua above security but shall not be a financial creditor within the meaning of Section 5 sub-sections
(7) and (8). [Para 30][1062-A-C]
6. The Appellate Tribunal has dealt with Section 5(8)(f) while rejecting the claim of the appellant as to be the financial creditor. It appears that the submission based on Section 5(8) (i) was not addressed before the Appellate Tribunal. This Court, thus, uphold the decision of the Resolution Professional as approved by the NCLAT as correct. The appellant is not financial creditor of the corporate debtor. Hence, Miscellaneous Application was rightly rejected by the Adjudicating Authority.This Court, however, make it clear that observations made by us in this judgment are only for deciding the claim of the appellant as the financial creditor within the meaning of Section 5(7) and 5(8) of the Code and shall have no bearing on any other proceedings undertaken by the appellant to establish any of its right in accordance with law. [Para 32][1062-F-H; 1063-A]
Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC
17 : [2019] 3 SCR 535; Pioneer Urban Land &
Infrastructure Ltd. v. Union of India (2019) 8 SCC
416 : [2019] 10 SCR 381 – relied on.
Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited and others (2020) 8 SCC 401 – referred to.
Jagjivandas Jethalal and another v. King Hamilton & Co. Indian Law Reports, Volume LV 1931, 617 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
This page is for informational and research purposes only and does not constitute legal advice. Consult a qualified advocate for advice specific to your situation.