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TMI Blog2021 (2) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... ditor of the corporate debtor, Doshion Veolia Water Solutions Private Limited. 2. Brief facts of this case for deciding this appeal are: L & T Infrastructure Finance Company Limited advanced the financial facility to Doshion Limited, a Company incorporated and registered under the Companies Act, 1956. A Facility Agreement dated 12.05.2011 was executed between the Doshion Limited (borrower) and L & T Infrastructure Finance Company Limited (lender) advancing to the borrower a financial facility of Rs. 40 crores repayable in 72 structured monthly instalments. Schedule IV of the facility agreement dealt with "Security Creation". The Board of Directors of Doshion Veolia Water Solutions Private Limited (corporate debtor) passed a Resolution on 26.07.2011 to give Non-Disposal Undertaking in favour of L & T Infrastructure Finance Company Limited whereby Board was authorised to provide an undertaking to the effect that 100% of their shareholding in Gondwana Engineers Limited (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 borrower. On 10.01.2012 a Pledge Agreement was executed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with all consequential benefits including voting rights in the Committee of creditors of the corporate debtor. The appellant stated that pledge of the shares by the corporate debtor was in essence a guarantee for financial debt and, therefore, appellant was a financial creditor of the corporate debtor. The Resolution Professional vide email dated 04.12.2018 rejected the claim of the appellant as financial creditor of the corporate debtor on the ground that there was no separate Deed of Guarantee in favour of the Assignor. The respondent filed an affidavit in reply before the Adjudicating Authority. After hearing the parties, the Adjudicating Authority passed an order dated 22.02.2019 rejecting the Miscellaneous Application filed by the appellant. The Adjudicating Authority held that the applicant's status as financial creditor of the corporate debtor is not proved in the light of Section 5(8) of the Code. 5. Aggrieved by the judgment of the Adjudicating Authority, the appeal was filed by the appellant before the Appellate Tribunal. The Appellate Tribunal held that pledge of shares in question do not amount to "disbursement of any amount against the consideration for the time value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s secured the payment of the loan, the liability of corporate debtor to L&T Infrastructure became coextensive to that of Doshion Ltd. under Section 128 of the Indian Contract Act, 1872 which, inter alia, financial creditor to the appellant herein and the loan was advanced for interest and the said loan was secured by the corporate debtor. 8. Learned counsel further submits that the judgment of this Court in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited and others, (2020) 8 SCC 401, relied by the learned counsel for the respondent is distinguishable from the facts of the present case. He submits that any security that would permit the right of action against the third party that is not the borrower, would amount to guarantee. The mere fact that corporate debtor has not borrowed money from the appellant, it cannot absolve the corporate debtor from its liability as guarantor. He submits that term guarantee is not to be understood narrowly and it has to be understood to include any security created by third party to secure repayment of financial debt including a pledge of shares. The pledge of shares by corporate debtor to secure the loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rring to objects and reasons of Insolvency and Bankruptcy Code contends that the purpose and object of the Code is entirely different. It is not a mechanism for recovery of any amount. The appellant has already moved to Debt Recovery Tribunal, Ahmedabad. 12. We have considered the submissions of the learned counsel for the parties and have perused the records. 13. The only question to be considered in this appeal is as to 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. 14. We may first notice the transaction in question on the basis of which the appellant claims to be treated as financial creditor qua corporate debtor. 15. The Facility Agreement dated 12.05.2011 was executed between the Doshian Ltd. and the L&T Infrastructure Finance Company Ltd. The corporate debtor was not a party to the Facility Agreement. It was the Doshion Ltd., the borrower who was to repay the loan of Rs. 40 crores. Schedule-IV of Facility Agreement is "Security Creation" which is a part of the Facility Agreement, is as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roversy. Part II of Chapter I of the Code deals with Insolvency Resolution Liquidation for Corporate Persons. Section 5 is the definition clause. Section 5(7) defines "financial creditor" in the following words: "Section 5(7) "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;" 20. What is 'financial debt' is defined in Section 5(8) which is to the following effect: "Section 5(8) "financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes- (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antee or indemnity for any of the items referred to in sub-clauses(a) to (h) of clause (8). Sub-clause (i) uses two expressions "guarantee" and "indemnity" for any of the items referred to in sub-clauses (a) to (h). 22. Chapter VIII of the Indian Contract Act, 1872 deals with "Of Indemnity and Guarantee". Section 124 defines "Contract of indemnity" and Section 126 defines "Contract of guarantee". Section 126 which is relevant for the present case is as follows: " Section 126. "Contract of guarantee", "surety", "principal debtor" and "creditor".-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 person who gives the guarantee is called the "surety"; the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written." 23. 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity for payment of a debt or performance of a promise is called "pledge". The bailor is in this case called the "pawnor". The bailee is called "pawnee".:" 26. The word 'guarantee' and 'indemnity' as occurring in Section 5(8)(i) has not been defined in the Code. Section 3 sub-section (37) of the Code provides that words and expressions used but not defined in the Code but defined in the Indian Contract Act, 1872 shall have the meanings respectively assigned to them. 27. Learned counsel for the appellant has referred to a judgment of the Bombay High Court in the Indian Law Reports, Volume LV 1931, 617, Jagjivandas Jethalal and another vs. King Hamilton & Co., which was case arising out of the suit filed to enforce an equitable mortgage of an immovable property. The defendants as owners of the immovable property in question created an equitable mortgage upon it as sureties for the firm of Sarda & Sons who owed money to the plaintiff. The Bombay High Court had occasion to consider Section 126 of the Contract Act in the above case. Noticing the arguments based on Section 126 of the Indian Contract Act raised by the respondent, the Bombay High Court noticed following a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k to JAL. Interim Resolution Professional has rejected the claim of the Asix Bank to be recognised as financial creditor of corporate debtor (JIL). The National Company Law Tribunal has approved the decision of Interm Resolution Professional rejecting the claim of Axis Bank as financial creditor against which appeal was filed before the Appellate Tribunal which was allowed. The corporate debtor had filed an appeal before this Court in which appeal one of the issues was as to whether the Axis Bank can be recognised as financial creditor of the corporate debtor on the strength of the mortgaged by the JIL, corporate debtor of its holding Co. JAL. This Court after noticing the facts, noted rival submissions of the parties on the above issue in detail. The two earlier judgments of this Court, namely, Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 and Pioneer Urban Land & Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 were extensively noted. Paragraphs 46 to 50.2 contain elaborate discussion regarding the essentials of "financial debt" and "financial creditor" which are to the following effect: "46. Applying the aforementioned fundamental principles to the definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended meaning of this definition but, and nevertheless, the requirement of existence of a debt being owed is not forsaken. 48. It is also evident that what is being dealt with and described in Section 5(7) and in Section 5(8) is the transaction vis-a-vis the corporate debtor. 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. 49. Expounding yet further, in our view, the peculiar elements of these 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring 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. 50.1. 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in Jaypee Infratech Limited (supra) by contending that the above judgment has been rendered in the specific facts scenario which does not apply to the present case at all. Shri Vishwanathan submits that in Jaypee Infratech Limited case (supra) corporate debtor had created mortgage for the loan obtained by the parent Company and no benefit of such loan has been received by the corporate debtor whereas in the present case corporate debtor has been the direct and real beneficiary of the loan advanced by Assigner to the parent Company of the corporate debtor. The above point as contended by the learned counsel does not commend us. The present is also a case where only security was created by the corporate debtor in 40,160 shares of GEL, there was no liability to repay the loan taken by the borrower on the corporate debtor in the present case. At best the Pledge Agreement and Agreement of undertaking executed on 10.01.2012, that is, subsequent to Facility Agreement, is security in favour of Lender-Assignor who at best will be secured creditor qua corporate debtor and not the financial creditor qua corporate debtor. 32. We may notice that the Appellate Tribunal has dealt with Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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