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2021 (2) TMI 121 - SC - Insolvency and BankruptcyFinancial Creditors or not - Secured creditor - pledge of the shares - whether the appellant is a financial creditor within the meaning of Section 5(8) of the Code on the strength of pledge agreement dated 10.01.2012 and Deed of Undertaking dated 10.01.2012 entered into with L T Infrastructure? - HELD THAT - As clear from the definition 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 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 40 crores is undertaken by the corporate debtor. It was the borrower who had promised to repay the loan of 40 crores in Facility Agreement dated 12.05.2011 and it was borrower who had undertaken to discharge the liability towards lender. This Court 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). 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 which has now been pressed before us. We 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. Appeal dismissed.
Issues Involved:
1. Whether the appellant is a financial creditor within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016. 2. Whether the pledge of shares by the corporate debtor constitutes a guarantee under Section 126 of the Indian Contract Act, 1872. 3. Interpretation of the term "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016. Issue-wise Detailed Analysis: 1. Whether the appellant is a financial creditor within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016: The appellant claimed to be a financial creditor based on a pledge agreement and a deed of undertaking executed with L&T Infrastructure. The Supreme Court examined the Facility Agreement dated 12.05.2011 between Doshion Limited and L&T Infrastructure Finance Company Limited, where the corporate debtor was not a party. The corporate debtor had pledged shares as security but did not promise to discharge the liability of the borrower. The court noted that for a debt to be considered a financial debt under Section 5(8), it must be disbursed against consideration for the time value of money. The court emphasized that the corporate debtor only provided security interest and did not owe any financial debt to the appellant. Thus, the appellant could not be considered a financial creditor. 2. Whether the pledge of shares by the corporate debtor constitutes a guarantee under Section 126 of the Indian Contract Act, 1872: The court referred to Section 126 of the Indian Contract Act, 1872, which defines a contract of guarantee as a contract to perform the promise or discharge the liability of a third person in case of his default. The court found that the pledge agreement did not constitute a contract of guarantee as it did not involve the corporate debtor promising to discharge the liability of the borrower. The pledge was limited to the shares and did not extend to a guarantee to repay the loan. Therefore, the pledge of shares could not be equated with a guarantee under the Contract Act. 3. Interpretation of the term "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016: The court analyzed the definition of "financial debt" under Section 5(8) of the Code, which includes a debt disbursed against the consideration for the time value of money. The court referred to the judgment in Jaypee Infratech Limited vs. Axis Bank Limited, where it was held that a person having only security interest over the assets of the corporate debtor does not qualify as a financial creditor. The court reiterated that the essential element of disbursal against the consideration for the time value of money must be present for a debt to be considered a financial debt. In this case, the corporate debtor only provided security by pledging shares and did not owe any financial debt to the appellant. Therefore, the appellant could not be considered a financial creditor under Section 5(8) of the Code. Conclusion: The Supreme Court upheld the decisions of the Resolution Professional and the National Company Law Appellate Tribunal (NCLAT) that the appellant is not a financial creditor of the corporate debtor. The court dismissed the appeal, clarifying that the observations made are specific to the claim of the appellant as a financial creditor and do not affect any other proceedings the appellant may undertake to establish its rights in accordance with the law.
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