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TMI Blog2023 (7) TMI 311X X X X Extracts X X X X X X X X Extracts X X X X ..... rders passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Court-III dated 31.03.2023. By first order dated 31.03.2023, I.A. No. 1311/2022 filed by the Appellant in C.P No. 2915/IBC/MB/2019 has been rejected and by the second order of the same date i.e. 31.03.2023, I.A. No. 1143/2022 filed by the Resolution Professional for approval of the Resolution Plan has been approved and the Resolution Plan submitted by Respondent No.3 has been approved by the Adjudicating Authority. Appellant aggrieved by the aforesaid orders has come up in these Appeals. The brief facts of the case giving rise to these Appeals are: i. Yes Bank Ltd. Granted a term loan of INR 150 Crores (Term Loan - I) to BILT Graphic Paper Products Ltd. (BGPPL/Principal Borrower) on 01.09.2015. A second term loan of INR 250 Crore (Term Loan - II) was granted to BGPPL on 04.05.2016. ii. Security for the loans was entrusted in favour of the Security Trustee namely Vistara ITCL (India) Ltd. Ballarpur Industries Limited (Corporate Debtor) in order to secure the loan facility availed by BGPPL created a mortgage with exclusive charge in favour of the Security Trustee on Industrial Complex and La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as Successful Resolution Applicant of the Corporate Debtor, whose Resolution Plan envisages sale of this land and proceeds shall be provided to the Financial Creditors - members of the CoC of the Corporate Debtor. The Appellant who has secured interest in the aforesaid asset and who had already filed a claim in the CIRP and his claim was admitted in the category of 'Other Creditors' with nominal value of Re.1, filed an I.A. No. 1131 of 2022 praying for rejection of the revised Resolution Plan submitted by Finquest Financial Solutions Pvt. Ltd. with other prayers. xv. The Adjudicating Authority issued notice on the application filed by the Appellant. A reply was filed by the Resolution Professional to the I.A. No. 1131 of 2022 refuting the claim of the Appellant/Applicant. In the reply, the Resolution Professional submitted that object of the IBC is to promote the resolution and not liquidation of the Corporate Debtor. In the reply filing of claim of the Appellant in Form C was mentioned. It was submitted that there was not default of BGPPL and the claim of the Appellant was admitted at notional value of Re.1 in the category of 'Other Creditors'. The Corporate Guarantee given by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otections of the Appellant shall come to an end. The security interest of the Appellant has not been discharged in any know process of law. The Appellant has right to realize its security. Learned counsel for the Appellant although submitted that as on date no default has been committed by the Principal Borrower i.e. BGPPL in repayment of loan, default may come in future leaving the Appellant unprotected. Learned counsel for the Appellant has placed reliance on judgment of Hon'ble Supreme Court in "M/s. Vistra ITCL (India) Ltd. and Ors. vs. Mr. Dinkar Venkatasubramanian and Anr., Civil Appeal No. 3606 of 2020, decided on 04.05.2023". Learned counsel submit that "Vistra ITCL (India) Ltd." was a case where security interest of the Appellant - M/s Vistra ITCL (India) Ltd. was sought to be relinquished. The Hon'ble Supreme Court held that the Appellant shall be entitled to be treated as a secured creditor and directed the Successful Resolution Applicant to protect the security interest of Vistra ITCL over the pledged shares under Section 52 of the Code. It is submitted that the case of "Vistra ITCL (India) Ltd." fully support the submission of the Appellant. 4. Shri Ashish Dholaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant had filed claim only with regard to Term Loan-II on 19.10.2022. The Resolution Professional rejected the claim of the Appellant as Financial Creditor which rejection was never challenged. The Resolution Professional allocated notional value of Re.1 to the Appellant, which also was never challenged. In "Vistra ITCL (India) Ltd." case, which has been relied by the Appellant, there is challenge to non-inclusion of Appellant in the CoC. 6. Shri Krishnan Venugopal, learned senior counsel appearing for the Successful Resolution Applicant refuting the submission of learned counsel for the Appellant contends that the Code permit resolution of the Corporate Debtor. The Appellant only having a security interest is not interested in resolution of the Corporate Debtor. There is no default committed by the Principal Borrower, the Appellant cannot be permitted to secure himself in unlikely default of the Principal Borrower. Acceptance of argument of the Appellant shall lead to hydra head propping which is not permissible. The provisions of Section 52 and 53 of the I&B Code cannot be dragged in CIRP process. Even the Financial Creditor is not entitled of full value of its security but only f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt gives additional right to the Lender but it does not affect any security. 8. We have considered the submissions of learned counsel for the parties and perused the record. 9. Before we proceed to consider the rival submissions of counsel for the parties, it is necessary to notice few provisions of the I&B Code and CIRP Regulations, 2016, which delineates the Scheme of the Code. Section 3(31) of the Code defines 'security interest' in following words: "3(31). "security interest" means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance guarantee;" 10. After admission of application under Section 7, moratorium is declared under Section 13. Section 14 Sub-section (1) Sub-clause (c) which is relevant in the present case, is as follows: "14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by Yes Bank to BGPPL, the Principal Borrower. The Corporate Debtor created a charge on its immovable property by mortgaging the immovable property at Choudwar, Orissa for securing Term Loan-I and Term Loan-II. A corporate guarantee was also executed by the Corporate Debtor to secure Term Loan-II on 22.06.2016. (ii) The Principal Borrower has not committed any default in repayment of its loan to the Financial Creditor. (iii) In response to the public announcement by the IRP, the Appellant filed its claim on 05.02.2020 in Form 'C' for an amount of INR 133,24,05,045/-. The Resolution Professional on 19.10.2020 communicated to the Appellant that since there is no default by Principal Borrower, the Appellant's claim cannot be accepted as Financial Creditor and Appellant's claim is categorized in the category of 'Other Creditors'. (iv) In the final list of creditors issued on 24.12.2020, Appellant was placed in the category of 'Other Creditors' and against the claim of INR 133,24,05,045/-, a notional value of Re.1 was allocated to the Appellant. (v) Appellant never challenged the rejection of its claim as Financial Creditor and categorisation of Appellant as 'Other Creditors' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n terms of the IBC in view of the order allowing prayer (b); (f) Pass any such other or further orders as this Hon'ble Tribunal may deem fit and proper in the interest of justice." 16. The Resolution Professional did not accept the claim of Appellant as Financial Creditor rightly. Law in this context is well settled. We may refer to judgment of Hon'ble Supreme Court in "Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. vs. Axis Bank Ltd. & Ors., (2020) 8 SCC 401" where the Hon'ble Supreme Court had occasion to consider the role and status of Financial Creditor and a Creditor who has only security interest. Para 50, 50.1, 50.2 and 51 are as follows: "50. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons (supra), leaves nothing to doubt that 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 whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The respondent mortgagees are not the financial creditors of corporate debtor JIL 51. Indisputably, the debts in question are in the form of third party security; said to have been given by the corporate debtor JIL so as to secure the loans/advances/facilities obtained by JAL 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 JIL." 17. A Financial Creditor who is part of the CoC has important role to play in the reorganisation and insolvency resolution of the Corporate Debtor. The Creditor who has only security interest is only interested in his security interest and have no interest in revival of the Corporate Debtor. The aforesaid is clear from the prayers made in I.A. No. 1311 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation 37 of the CIRP Regulation, 2016, which provides as follows: "37. Resolution plan. - A resolution plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets, including but not limited to the following:- (a) transfer of all or part of the assets of the corporate debtor to one or more persons; (b) sale of all or part of the assets whether subject to any security interest or not; [(ba) restructuring of the corporate debtor, by way of merger, amalgamation and demerger;] (c) the substantial acquisition of shares of the corporate debtor, or the merger or consolidation of the corporate debtor with one or more persons; [(ca) cancellation or delisting of any shares of the corporate debtor, if applicable;] (d) satisfaction or modification of any security interest; (e) curing or waiving of any breach of the terms of any debt due from the corporate debtor; (f) reduction in the amount payable to the creditors; (g) extension of a maturity date or a change in interest rate or other terms of a debt due from the corporate debtor; (h) amendment of the constitutional documents of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 53 in event of liquidation of the Corporate Debtor. Insolvency resolution process and liquidation are two different concepts with two different consequences. When in the insolvency resolution process claim of Financial Creditors are dealt with, there is no cap to the effect that they are entitled to receive the amount equivalent to their debt which is owed by the Corporate Debtor. Thus, despite Financial Creditor having security interest in the assets of the Corporate Debtor, they can be dealt with in the resolution plan in any manner as per the commercial wisdom of the CoC. When the security interest of Financial Creditor can be dealt with in the resolution plan in any manner, we fail to see that how a third party having security interest in the assets of the Corporate Debtor can claim any higher status or different status from the Financial Creditor. 23. Now we come to the judgment of Hon'ble Supreme Court in "(2022) 1 SCC 401, Jaypee Kensington Boulevard Apartments Welfare Association and Ors. vs. NBCC (India) Ltd. & Ors.", which is the sheet anchor of the argument of learned counsel for the Appellant. Brief outline and sketch of the case in "Jaypee Kensington" has been no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case. In Para 251 of the judgment, the Hon'ble Supreme Court noticed the relevant Clause 23 of Schedule 3 in the plan, which is to the following effect: "251. In the resolution plan, apart from various stipulations in regard to the land of JIL and creation of two SPVs with transfer of certain parcels of land, the resolution applicant stated in Clause 23 of Schedule 3 relating to 'reliefs and concessions' as under: - "23. The JAL Lenders Mortgaged Land shall continue to be vested in the Corporate Debtor free of any mortgage, charge and encumbrance."" 26. The Hon'ble Supreme Court has further held that with regard to mortgage of 100 acres, the Adjudicating Authority does not render any specific decision, which has been noticed in Para 253 in following words: "253. To put it in clear terms, the net outcome of the propositions, proceedings and findings noticed in the preceding paragraphs is as follows: 858 acres of JIL's land was mortgaged with the lenders of JAL; in the resolution plan, NBCC sought the relief that such land shall continue to remain vested in the corporate debtor JIL free from any mortgage, charge and encumbrance; 758 acres, out of this 858 acres, of land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorrect cross-reference was made to Clause 1 of Schedule 3 of the resolution plan. This error was also corrected in the order dated 17.03.2020 and correct reference was made to Clause 23 of Schedule 3 but, again, the implication of this correction totally escaped the attention of the Adjudicating Authority. 259.3. As noticed, in the said Clause 23, a fleeting suggestion on the part of the resolution applicant had been that 'JAL lenders mortgaged land shall continue to be vested in the corporate debtor free from any mortgage, charge and encumbrance'. The Adjudicating Authority dealt with the said clause of the resolution plan in an equally cursory manner by observing that the point was not clear but, if it was referring to the land mortgaged with the lenders of JAL, the issue had already been decided by the Supreme Court and need not be reiterated. In this entire process of mistakes/errors (might be accidental) and corrections as also cursory observations, the Adjudicating Authority totally missed out that one transaction relating to 100 acres of land, being 'Tappal Property 1', remained unaffected by the judgment in Anuj Jain (supra); and that the security creating over this la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Resolution Professional has communicated to the Appellant on 19.10.2020 that since no default has been committed by the Principal Borrower against its claim of Rs.133 Crore and odd, nominal value of Re.1 only is admitted. It is also noticeable that the Appellant at no point of time challenged the admission of its claim by Resolution Professional as 'Other Creditor'. The main distinguishing feature of present case with that of "Jaypee Kensington" is that in "Jaypee Kensington" security interest of the Lender of that case was not part of the CIPR process but in the present case same was part of the CIRP process. 30. When any asset including security interest in the asset is part of the CIRP process, there is no constraint or prohibition in I&B Code or Regulations to deal with the said asset including a security interest. The observation of the Hon'ble Supreme Court in "Jaypee Kensington" was observation in the facts of that case. In the aforesaid background the Hon'ble Supreme Court held that security created in the land could not have been annulled in the manner suggested in the plan. The plan in the aforesaid case in Clause 23 of Schedule 3 provided that the mortgaged land shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Thus, we are presented with a difficult situation, wherein, Appellant No.1 - Vistra, a secured creditor, is being denied the rights under Section 52 as well as Section 53 of the Code in respect of the pledged shares, whereas, the intent of the amended Section 30(2) read with Section 31 of the Code is too contrary, as it recognises and protects the interests of other creditors who are outside the purview of the CoC. To our mind, the answer to this tricky problem is twofold. First is to treat the secured creditor as a financial creditor of the Corporate Debtor to the extent of the estimated value of the pledged share on the date of commencement of the CIRP. This would make it a member of the CoC and give it voting rights, equivalent to the estimated value of the pledged shares. However, this may require re consideration of the dictum and ratio of Anuj Jain (supra) and Phoenix ARC (supra), which would entail reference to a larger bench. In the context of the present case, the said solution may not be viable as the resolution plan has already been approved by the CoC without Appellant No. 1 Vistra being a member of the CoC. Therefore, we would opt for the second option. The second o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the Respondent has placed reliance on judgment of Hon'ble Supreme Court in "State of Pujab & Ors. vs. Rafiq Masih, (2014) 8 SCC 883", where Hon'ble Supreme Court dealing with Article 141 and 142 of the Constitution of India enumerated the principles in Paras 8 and 11, which are to the following effect: "8. In our view, the law laid down in Chandi Prasad Uniyal's case, no way conflicts with the observations made by this Court in the other two cases. In those decisions, directions were issued in exercise of the powers of this Court under Article 142 of the Constitution, but in the subsequent decision this Court under Article 136 of the Constitution, in laying down the law had dismissed the petition of the employee. This Court in a number of cases had battled with tracing the contours of the provision in Article 136 and 142 of the Constitution of India. Distinctively, although the words employed under the two aforesaid provision speak of the powers of this Court, the former vest a plenary jurisdiction in supreme court in the matter of entertaining and hearing of appeals by granting special leave against any judgment or order made by a Court or Tribunal in any cause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is an excess over the Loan amount, the Borrower shall within seven days of notice from the Bank, deposit with the Bank additional security in the form of cash or such other securities which may be acceptable to the Bank, failing which the Bank may at its discretion sell, dispose off or realise any or all of the said securities without being liable for any loss or damage or diminution in value sustained thereby." 40. Said clause has been provided in the Agreement to protect the Lender in case of security falls so as to create a deficiency in the margin requirement specified by the Bank from time to time. A case where security is lost or extinguished is also a case where right given to the Lender under Clause 11 can be exercised. More so, when there is no default by the Principal Borrower in the present case and there is no actual loss suffered by the Appellant in any manner, in the present case when security interest of the Appellant has been extinguished by the Resolution Plan it was always open for the Appellant to ask the Principal Borrower to furnish additional security to protect the interest of the Lender. Clause 11 can very well be utilized by the Appellant to protect th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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