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TMI Blog2020 (2) TMI 1700X X X X Extracts X X X X X X X X Extracts X X X X ..... n 25, for the purpose of application of Section 43 of the Code in any insolvency resolution process, what a resolution professional is ordinarily required to do could be illustrated as follows: 1. In the first place, the resolution professional shall have to take two major but distinct steps. One shall be of sifting through the entire cargo of transactions relating to the property or an interest thereof of the corporate debtor backwards from the date of commencement of insolvency and up to the preceding two years. The other distinct step shall be of identifying the persons involved in such transactions and of putting them in two categories; one being of the persons who fall within the definition of 'related party' in terms of Section 5(24) of the Code and another of the remaining persons. 2. In the next step, the resolution professional ought to identify as to in which of the said transactions of preceding two years, the beneficiary is a related party of the corporate debtor and in which the beneficiary is not a related party. It would lead to bifurcation of the identified transactions into two sub-sets: One concerning related party/parties and other concerning unrela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section (3). Looking to the legal fictions created by Section 43 and looking to the duties and responsibilities of the resolution professional and the Adjudicating Authority, ordinarily an adherence to the process illustrated hereinabove shall ensure reasonable clarity and less confusion; and would aid in optimum utilization of time in any insolvency resolution process. Whether lenders of JAL could be treated as financial creditors? - HELD THAT:- Such lenders of JAL, 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 of the Code; and hence, such lenders of JAL do not fall in the category of the 'financial creditors' of the corporate debtor JIL. These appeals are allowed to the extent and in the manner that: 1) The impugned order dated 01.08.2019 as passed by NCLAT in the batch of appeals is reversed and is set aside. 2) The appeals prefer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ordinary course of business or financial affairs 16. The concern expressed by lenders of JAL is legally untenable 17. Summation: The transactions in question are hit by Section 43 IBC 18. Search and commandeering of preference at a relevant time 19. Other aspects of the application made by IRP - allegations of transactions being undervalued and fraudulent I WHETHER LENDERS OF JAL COULD BE CATEGORISED AS I FINANCIAL CREDITORS OF JIL 20. Preliminary and background 21. Reasoning and Findings of NCLT 22. Rival submissions 23. Unique position of financial creditor-as explained in Swiss Ribbons 24. Financial debt-ratio of Pioneer Urban 25. The expressions means and includes in the definition clauses-effect 26. The essentials for financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so questioned this aspect of the order impugned that the aforesaid two appeals, involving the question as to whether the lenders of JAL could be categorised as financial creditors of JIL for the purpose of IBC, have been allowed by NCLAT without recording any findings and without any discussion in that regard. Brief Outline and the Issues Involved 2. Before proceeding further, we may draw up a brief outline of the subject-matter and the issues involved in these appeals. 2.1. As shall be noticed hereafter later, the CIRP concerning the corporate debtor JIL has already undergone several rounds and circles of proceedings in NCLT, NCLAT and at least twice over in this Court. 2.2. For what has been indicated in the introduction, it is evident that two major issues would arise in these appeals. One, as to whether the transactions in question deserve to be avoided as being preferential, undervalued and fraudulent, in terms of Sections 43, 45 and 66 of the Code; and second, as to whether the Respondents (lender of JAL) could be recognized as financial creditors of the corporate debtor JIL on the strength of the mortgage created by the corporate debtor, as collateral security ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be categorised as financial creditors of JIL for the purpose of the Code. As already noticed, the appeals against the said orders dated 09.05.2018 and 15.05.2018 are purportedly allowed as per the result recorded in the impugned order dated 01.08.2019, but without any discussion in that regard. Aggrieved, one of the lenders of the corporate debtor JIL, IIFCL (Appellant of Civil Appeal D. No. 32881 of 2019) has also questioned this aspect of the order impugned while asserting that such mortgagees cannot be taken as financial creditors of the corporate debtor JIL. Parties and their respective roles and interest in the matter 3. In view of the issues arising for determination in these appeals, with several parties carrying different roles, status and interests, worthwhile it would be to narrate at the outset, in brief, the relevant particulars of the key parties involved as follows: 3.1. Jaypee Infratech Limited (JIL): It is the corporate debtor company in whose relation CIRP is pending; and the mortgage transactions concerning its properties were questioned in the application filed by the Interim Resolution Professional. Such transactions form the subject-matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also be worthwhile to take note of the relevant particulars of the properties and the transactions involved in this dispute. It may be usefully noticed that out of seven transactions that were questioned by IRP, the Adjudicating Authority held that six of them were preferential, undervalued and fraudulent and passed the orders for their avoidance while accepting the contentions of IRP. It may also be observed that five out of these six transactions were preceded by previous mortgage transactions for securing the loans/facilities to JAL. The transactions in question, with previous transactions and flow thereof, as given out during the course of submissions, could be comprehensively viewed as under: 4.1. The transactions in favour of the Consortium of Banks and Financial Institutions: Property/transaction in question Previous transaction/s and flow thereof Mortgage deed dated 29.12.2016 for 167.229 acres of land situated at Village Chhalesar and Chaugan, TehsilEtmadpur, District Agra, Uttar Pradesh executed by JIL in favour of Axis Trustee Services Ltd. to provide an additional security for term loans of Rs. 21081.5 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2014 released on 07.03.2017 and re-mortgaged on 07.03.2017. 4.3. The exclusive mortgage transaction in favour of the Standard Chartered Bank Limited: Property/transaction in question Previous transaction/s and flow thereof Mortgage deed dated 24.05.2016 for 25.0040 acres of land situated at Village Sultanpur, Sector-128, Noida, District Gautam Buddh Nagar, Uttar Pradesh executed by JIL in favour of IDBI Trusteeship Services Ltd., as additional security, against the facility agreement dated 29.08.2012 between Standard Chartered Bank and JAL of Rs. 400 crores. The security was further extended for facility II for Rs. 450 crores on 27.12.2012; for facility III for Rs. 538.16 crores on 29.04.2015; for facility IV for Rs. 81.84 crores on 2 9 . 0 4 . 2 0 1 5 and for working capital facility Rs. 297 crores on 29.08.2012. 13 Initial mortgage deed dated 24.06.2009, extended by m o r t g a g e deed dated 27.11.2012 (for increased facility amount of Rs. 1300 crores as compared to Rs. 900 crores earlier). Vide mortgage on 23.03.2013, additional land admeasuring 25.0040 acres was added in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e vehicle. Finance was obtained from a consortium of banks against the partial mortgage of land acquired and a pledge of 51% of the shareholding held by JAL. Housing plans were envisaged for the construction of real estate projects in two locations of the land acquired, one in Wish Town, Noida and another in Mirzapur. Several other aspects of the dealings by these companies, their creditors and other stakeholders need not be dilated for the present purpose. 6.1. The crucial and relevant part of the matter is that IDBI Bank Limited instituted a petition Under Section 7 of the Code before the NCLT, seeking initiation of Corporate Insolvency Resolution Process against JIL, while alleging that JIL had committed a default in repayment of its dues to the tune of Rs. 526.11 crores. JIL filed its objections to the petition but later on, withdrew the objections and furnished consent for resolution plan under the provisions of the Code. On 09.08.2017, NCLT initiated the CIRP in respect of JIL. An order of moratorium was issued Under Section 14 by which, the institution of suits and continuation of pending proceedings, including execution proceedings were prohibited and an Interim Resoluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Insolvency and Bankruptcy (Amendment) Ordinance, 2018, more particularly the amended definition of the expression financial creditors ; (iii) We permit the IRP to invite fresh expressions of interest for the submission of resolution plans by applicants, in addition to the three short-listed bidders whose bids or, as the case may be, revised bids may also be considered; (iv) JIL/JAL and their promoters shall be ineligible to participate in the CIRP by virtue of the provisions of Section 29A; (v) RBI is allowed, in terms of its application to this Court to direct the banks to initiate corporate insolvency resolution proceedings against JAL under the IBC; (vi) The amount of Rs. 750 crores which has been deposited in this Court by JAL/JIL shall together with the interest accrued thereon be transferred to the NCLT and continue to remain invested and shall abide by such directions as may be issued by the NCLT. 6.3. It had been during pendency of the aforesaid proceedings that the application leading to present appeals came to be filed by IRP on 06.02.2018, complaining against the transactions in question. However, before taking note of the matters involved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmit report to the adjudicating authority NCLT within such time. In the second phase of 45 days commencing from 21st December, 2019, margin is provided for removing any difficulty and to pass appropriate orders thereon by the Adjudicating Authority. ii) The pendency of any other application before the NCLT or NCLAT, as the case may be, including any interim direction given therein shall be no impediment for the IRP to receive and process the revised resolution plan from the abovenamed two bidders and take it to its logical end as per the provisions of the I B Code within the extended timeline prescribed in terms of this order. iii) We direct that the IRP shall not entertain any expression of interest (improved) resolution plan individually or jointly or in concert with any other person, much less ineligible in terms of Section 29A of the I B Code. iv) These directions are issued in exceptional situation in the facts of the present case and shall not be treated as a precedent. v) This order may not be construed as having answered the questions of law raised in both the appeals, including as recognition of the power of the NCLT/NCLAT to issue direction or order not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by IRP forming subject-matter of the first issue involved in these appeals. 9. The IRP, in terms of his duties under Clause (j) of Section 25(2) of the Code 18 , made the application under consideration before the Adjudicating Authority stating, inter alia, that the corporate debtor was itself in dire need of funds; and was facing severe liquidity crunch to complete the construction of projects and deliver flats to home buyers as well as to honour the payment obligations to financial creditors, including the Fixed Deposit Holders. It was contended that JIL could have sold/mortgaged its unencumbered land to raise funds to complete the construction of flats in a timely manner and fulfil its obligation to its creditors and prevent value deterioration or erosion or insolvency but then, the mortgages in question were created in a highly questionable manner and in complete disregard to the interests of the creditors and stakeholders of the corporate debtor. Also, that the mortgage of land was in nature of asset stripping and was entered with intent to defraud the creditors of the corporate debtor without obtaining the approval of shareholders. 9.1. In opposition to the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the nominees of lenders attended the Board Meeting of the corporate debtor in which decision to mortgage the land was taken, but that cannot be treated as approval or no-objection of lenders, as the lenders invariably have covenants in the loan agreement that require their approval for creating interest in favour of any one of the unencumbered assets of the borrower. Moreover, directors of the corporate debtor (JIL) and the related party (JAL) were well aware of the fact that the corporate debtor was in default and had been declared as NPA by several creditors. The Tribunal, thus, formed the opinion that when the directors of the corporate debtor were fully aware that they were in the twilight zone and insolvency was imminent, they ought to have exercised due diligence in minimizing the potential loss to the creditors but they entered into such transactions which ex facie gave benefits to the related party JAL, with a clear intent to defraud the creditors of JIL. The Tribunal further observed that the land in question could have been sold to generate cash that would have been sufficient to complete the construction of flats and the home buyers are directly and adversely affect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atech Ltd. (JIL) has by way of mortgage of unencumbered land created security interest in favour of lenders of the Jaiprakash Associates Ltd. (JAL), which happens to be the holding company of JIL, without any consideration. We have also found that the corporate debtor was facing liquidity crunch and their accounts were declared as NPA and even after formation of Joint Lender Forum, without obtaining approval from Joint Lender Forum, unencumbered land of the corporate debtor has been mortgaged in favour of lenders of JAL. There by this transfer has the effect of putting the JAL, one of the creditors of JIL in a beneficial position than it would have been in the event of distribution of assets being made by Section 53 of the code. The said mortgage of immovable properties, i.e. of the unencumbered land of the corporate debtor has been made without any consideration to the corporate debtor. Therefore the said transaction is covered under the umbrella of Section 45(1) of the Code and will be treated as an undervalued transaction as defined Under Section 45 of the Code. *** *** *** In this case, we have found that impugned transactions are covered under preferential transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions, details of which are given in the Schedule of the judgment are declared as fraudulent, preferential and undervalued transactions as defined Under Section 66, 43 and 45 of the Code respectively. Transactions given in the following Schedule of property have been found as preferential, undervalued and fraudulent, therefore, we pass the order for release and discharge of the security interest created by the Corporate Debtor in favour of lenders of the Jaiprakash Associates Ltd. under the provision of Section 44(c) of the Insolvency and Bankruptcy Code 2016. We also pass an order Under Section 48(a) of the Code that the properties mortgaged by way of preferential and undervalued transactions shall from now on be deemed to be vested in the Corporate Debtor. 21 Appeals before NCLAT: the impugned order 11. Assailing the aforesaid order passed by NCLT accepting the application of IRP in relation to six of the mortgage transactions, the aggrieved parties filed separate appeals before the Appellate Tribunal, the NCLAT. The Appellate Tribunal took note of the facts of the case and the rival contentions and proceeded to upturn the order passed by NCLT on the considerations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with Section 53. As Clause (a) of Sub-section (2) of Section 43 is not attracted, the question of applicability of Clause (b) of Sub-section (2) of Section 43 does not arise. 66. Apart from the aforesaid position of law in respect of mortgage, in question, as per Sub-section (3) of Section 43, 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' or the transferee . The mortgages in question which were made in favour of the Appellants-Banks and Financial Institutions have been made in ordinary course of business and financial affairs of the transferee, as apparent from the relevant facts. 67. Therefore, we hold that Section 43 is not attracted to any of the transaction/mortgage(s) made in favour of the Appellants. 11.2. The Appellate Tribunal further proceeded to hold that the provisions of Section 45 of Code, for avoidance of undervalued transactions, were not applicable in relation to the transactions in que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 66. The Appellate Tribunal held,- 76. In the present case, we have noticed that the transactions in question i.e. mortgage(s) were made in favour of the 'Banks and Financial Institutions' by the 'Corporate Debtor' ('Jaypee Infratech Limited') in the ordinary course of business of the 'Corporate Debtor'. The Appellants-Banks and Financial Institutions have given loans to the holding Company namely-'Jaiprakash Associates Limited'. The 'Corporate Debtor' being one of the group company, like a guarantor, executed mortgage deed(s) in favour of the Appellants-'Banks and Financial Institutions'. We have seen that none of the transactions were 'preferential transaction' or 'undervalued transaction'. It has not been alleged that the transactions, in question, were made to defraud the creditors in terms of Section 49 so allegation has been made that such transactions amount to 'extortionate credit' as defined Under Section 50. Therefore, the Adjudicating Authority in absence of any such finding is not empowered to pass order Under Section 51. Further, as we have held that the transactions were made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, as security and includes a mortgage; Section 3(6): claim means-- (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured; Section 3(8): corporate debtor means a corporate person who owes a debt to any person; Section 3(10): creditor means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder; Section 3(11): debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt; Section 3(12): default means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be; Section 3(30): secured creditor means a creditor in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to be an amount having the commercial effect of a borrowing; and (ii) the expressions, allottee and real estate project shall have the meanings respectively assigned to them in Clauses (d) and (zn) of Section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016); 22 (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) 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) of this clause; Section 5(20): operational creditor means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred; Section 5(21): operational debt means a claim in respect of the provision of goods or services including employmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving more than two directors in common between the corporate debtor and such person; or (iii) interchange of managerial personnel between the corporate debtor and such person; or (iv) provision of essential technical information to, or from, the corporate debtor; 12.2. The concept and consequences of preferential transactions at a relevant time are provided in Sections 43 and 44 of the Code, which may also be usefully extracted as follows: Section 43. Preferential transactions and relevant time.- (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in Sub-section (2) to any persons as referred to in Sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in Section 44. (2) A corporate debtor shall be deemed to have given a preference, if-- (a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the giving of the preference to be vested in the corporate debtor; (b) require any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred; (c) release or discharge (in whole or in part) of any security interest created by the corporate debtor; (d) require any person to pay such sums in respect of benefits received by him from the corporate debtor, such sums to the liquidator or the resolution professional, as the Adjudicating Authority may direct; (e) direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate; (f) direct for providing security or charge on any property for the discharge of any financial debt or operational debt under the order, and such security or charge to have the same priority as a security or charge released or discharged wholly or in part by the giving of the preference; and (g) direct for providing the extent to whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage-deed. (b) Simple mortgage.- Where, without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage-money, and agrees, expressly or impliedly, that, in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage-money, the transaction is called a simple mortgage and the mortgagee a simple mortgagee. (c) Mortgage by conditional sale.- Where, the mortgagor ostensibly sells the mortgaged property- on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale and the mortgagee a mortgagee by conditional sale: Provided that no such transaction shall be deemed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. 127. Consideration for guarantee.- Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. WHETHER THE TRANSACTIONS IN QUESTION ARE PREFERENTIAL Broad features of rival contentions and submissions 13. As noticed, being aggrieved by the order so passed by NCLAT, three sets of parties have preferred these appeals. Multidimensional and wide-ranging submissions have been made by learned Counsel for the respective parties, raising the issues as to whether the transactions in question could be said to be preferential and/or undervalued and/or fraudulent, essentially within the meaning of Sections 43, 45, 49 and 66 of the Code. Elaborate submissions have also been made raising the issue as to whether the lenders of JAL, in whos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionary Clause Under Section 43(3) (a), which pertains to the transfer being made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee, the expression or will have to be read conjunctively and not in the alternative. That is to say, the word or will have to be read as and . This is because if or is read textually, it would mean that an overwhelming majority of transactions like the present one, whereby banks who would accept the security interest over properties belonging to a third party, after disbursing financial facilities to its loan, would get out of the net of preferential transactions , even if the transfer in question is not made in the ordinary course of business of the corporate debtor. It is submitted that the intention of legislature behind enacting a provision like Section 43 is that preferential transactions are avoided so that such assets would be available either with the resolution professional or with the liquidator, as the case may be, to put the corporate debtor back on its wheels or if that is not possible, to ensure that the creditors of the corporate debtor get a fair deal. With reference to the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 3,000 crores to approximately Rs. 24,000 crores and the number of creditors also went up from 2 to 24 with respect to the consortium mortgage. It is submitted that even though creation of third party security is a normal practice, the creation of every third party security cannot be always deemed to have been done in the ordinary course of business; that such 'ordinary course' has to be determined under the circumstances when such transactions were entered into; and, considering that JIL was declared NPA and had defaulted on its indebtedness to some of its lenders, securing of JAL's indebtedness under such circumstances cannot be construed to have been done in the ordinary course of business of the corporate debtor JIL. The learned Counsel for the Appellant has referred, inter alia, to the decision in Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty Ltd. (in liq) (1948) 76 CLR 463. Relevant Period and Related Party 14.2.2. It is further submitted that the term 'transaction' under the Code includes an agreement or arrangement in writing for the transfer of assets, or funds, goods or services from or to the corporate debtor. The use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, if at all such third party securities are avoided on the allegation of being preferential, it is likely to have a devastating effect on the entire economy because the bankers and financial institutions would then be left high and dry; and for future dealings, they shall have no alternative but to restrict their activities only to the direct party securities which would, in turn, result in retardation and regression. It is submitted that in a given case, the borrower may not be able to offer matching security to secure the entire advance requisite for its business and growth; and legally it is not impermissible between the related companies that one may provide security towards the loan/advance/facility obtained by the other. According to the Respondents, the scheme of the Code, and particularly its Part II, has never been to allow the processes of insolvency resolution or liquidation to operate detrimental to the interests of the financers like themselves (lenders of JAL). It is contended that on the true scope of the provisions contained Under Section 43 of the Code, with reference to the intent and object, the transactions in question, representing the security and guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submitted that the requirements set out Under Section 43(2) must be strictly construed and in the instant case, the two prongs Under Section 43(2) have not been satisfied. With reference to UNCITRAL Legislative Guide on Insolvency Law at para 177, it is submitted that as per Section 43(2)(a), a preference could only be given to an existing creditor such that he is preferred over other creditors but in this matter, the security was provided for the benefit of the Respondent bank, which did not have a pre-existing creditor-debtor relationship with the corporate debtor. Further, the security was provided on account of the debt obligations of JAL, and not any antecedent debt obligations of the corporate debtor. 15.3.4. It is further submitted, without prejudice to the above, that even if JAL is taken to be a creditor within the meaning of Section 43(2)(a), then the requirements of Section 43(2)(b), the second prong of the two-fold requirement for a transaction to be a preference, are not met. It is submitted that the transfer in the instant case has no effect whatsoever on the relative position of JAL in the distribution waterfall - it remains an operational creditor without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ul defaulters' and not 'NPAs'. It is further argued that the distinctive position of a wilful defaulter and an NPA is also indicated in Section 29A of Code, where Section 29A(b) provides that a wilful defaulter can never be a resolution applicant whereas, Section 29A(c) provides that a company whose account has become non-performing may only be disqualified if the account has remained non-performing for a period of one year. It is submitted that RBI Master Circular on asset classification issued in July 2015 and June 2019 set out that an account may turn NPA qua a particular bank if the debts are not being serviced regularly but this does not mean that a particular company's accounts would have turned non-performing qua all its lenders. It is also submitted that the other account of corporate debtor with this Respondent turned NPA only in 2017, i.e., much after the creation of security in question. It is further contended that a company's account may easily become standard if, inter alia, the company regularizes its payment timelines or if lenders decide to revise the company's repayment obligations. Reliance is placed on the decisions of this Court in Kesha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Ltd. v. The Administrator, Kothari Orient Finance Ltd., the Official Liquidator and S. Ramaiah (2009) 152 Comp Case 282 (Mad) have been referred while submitting that a mere transfer of the assets within the look-back period would not make the transaction preferential except when it is coupled with the intent to prefer one creditor over the other. Further, for contending that the impugned transactions were made in the ordinary course of business of both the Respondent Bank and the corporate debtor, the Annual Reports of corporate debtor JIL have been referred with the submissions that the mortgaged properties were disclosed as 'inventories' for the corporate debtor being a real estate company; and hence, dealing with the 'inventories'/'stock-in-trade' is in the ordinary course of business. 15.5.1. It is further submitted that there is no relation between the financial position of the corporate debtor and the impugned transaction for another reason that as on the date of commencement of insolvency proceedings, the corporate debtor had 740 acres of unencumbered land, which could have been used to create security for the creditors of corporate debtor. Whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) Investment made in 99,50,00,000 shares of JIL (paid up value Rs. 995 crores) at its very nascent stage, which means contribution of substantial funds for the business of JIL without interest; (ii) Pledge of its 70,83,56,087 equity shares held in JIL in favour of the lender of JIL; (iii) Promoter Support Agreement to meet the Debt Service Reserve Account (DSRA) obligation of JIL towards its lenders; and (iv) Bank Guarantees of Rs. 212 crores in aggregate to meet the DSRA obligation of JIL for the financial assistance obtained by JIL. It is submitted that such dealings/transactions by JAL in favour of JIL depict the nature of business relationship between JAL and JIL and makes it amply clear that the impugned transactions were done in the ordinary course of business and financial affairs of JIL. It is further submitted that the mortgage of 858 acres of land made in favour of lenders of JAL fall within the ambit of Section 186 of Companies Act, 2013 25 and is not unauthorized. 15.7.1. It is contended that avoidance of preferential transactions applies to a case where the company's accounts has become stressed and there is a strong likelihood of it going into liquidation b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the provisions so contained in the Code were upheld as valid. In the course of such distillation, this Court took note, inter alia, of the pre-existing state of law as also the objects and reasons for enactment of the Code. While observing that the focus of the Code was to ensure revival and continuation of the corporate debtor, where liquidation is to be availed of only as a last resort, this Court pointed out that on its scheme and frame work, the Code was a beneficial legislation to put the corporate debtor on its feet, and not a mere recovery legislation for the creditors. This Court said,- 27. As is discernible, the Preamble gives an insight into what is sought to be achieved by the Code. The Code is first and foremost, a Code for reorganisation and insolvency resolution of corporate debtors. Unless such reorganisation is effected in a time-bound manner, the value of the assets of such persons will deplete. Therefore, maximisation of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends. 16.2. Keeping in view the objectives, discernible from the Preamble as also from the Statement of Objects and Reasons of the Code and the observations of this Court, we may now take an overview of the scheme and structure of the relevant parts of the Code. Part I thereof contains the provisions regarding title, extent, commencement and application of the Code as also defines various expressions used and employed in the Code. Different provisions have come into force on different dates, as permissible under proviso to Sub-section (3) of Section 1. Part II of the Code deals with insolvency resolution and liquidation for corporate persons. Chapter I of Part II makes provision for its applicability and also defines various expressions used in this Part (Sections 4 and 5). Chapter II of Part II contains the provisions for corporate insolvency resolution process in Sections 6 to 32 whereas Chapter III of this Part II contains the provisions for liquidation process in Sections 33 to 54 29 . 16.3. Though the provisions relating to 'preferential transactions and relevant time' (in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest for the benefit of a creditor who is owed on an earlier debt, when the transfer occurs no more than 90 days before the date when the bankruptcy petition is filed or (if the creditor is an insider) within one year of the filing, so that the creditor receives more than it would otherwise receive through the distribution of the bankruptcy estate. Under the circumstances described in 11 USCA 547, the bankruptcy trustee may, for the estate's benefit, recover a preferential transfer from the transferee. - Also termed preference; voidable preference; voidable transfer; preferential assignment; preferential debt payment.... 17.2. It could be readily noticed that as far back as from 15th century, the concept of 'preference' has been taken note of and the principles relating to avoidance of certain preferences have evolved, particularly in the fields of mercantile laws and more particularly in the laws governing insolvency and bankruptcy 32 ; and definitively from 1874, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicate the intention of legislature that when a transaction falls within the coordinates 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. 17.5. At this juncture, we may usefully refer to paragraph 177 of UNCITRAL Legislative Guide on Insolvency Law, as referred to and relied upon by learned Counsel for the Respondent as also paragraphs 178 and 179 thereof, to indicate the basic theory and principles governing the provisions under consideration. In the said Guide, while dealing with the topic of treatment of assets on commencement of insolvency proceedings, it is stated broadly on the theory of avoidance of preferential transactions as follows: (c) Preferential transactions (i) Criteria 177. Preferential transactions may be subject to avoidance where: (a) the transaction took place within the specified suspect period; (b) the transaction involved a transfer to a creditor on account of a pre-existing debt; and (c) as a result of the transaction, the creditor receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... encourages suppliers of goods and services to continue to do business with a debtor that may be having financial problems, but which is still potentially viable. Other defences available under insolvency laws include that the counterparty extended credit to the debtor after the transaction and that credit has not been paid (the defence is limited to the amount of the new credit); that the counterparty gave new value for which it was not granted a security interest; the counterparty can show that it did not know a preference would be created; that the counterparty did not know or could not have known that the debtor was insolvent at the time of the transaction; or that the debtor's assets exceeded its liabilities at the time of the transaction. Some of these latter defences, in particular those involving the intent of the parties to the transaction, suffer from the disadvantage of being difficult to prove and may make avoidance proceedings complex, unpredictable and lengthy. Analysing Section 43 of the Code 18. In the backdrop of the foregoing, we may now scrutinise Sections 43 and 44 of the Code. Section 44 provides for the consequences of an offending 35 preferential tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Sub-section (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; and (b) if the preference is given to a person other than a related party, the relevant time is a period of one year preceding such commencement date. In other words, for a transaction to fall within the mischief sought to be remedied by Sections 43 and 44 of the Code, it ought to be a preferential one answering to the requirements of Sub-section (2) of Section 43; and the preference ought to have been given at a relevant time, as specified in Sub-section (4) of Section 43. 18.3. However, even if a transaction of transfer otherwise answers to and comes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by preference is deemed to have been given; and is deemed to have been given at a relevant time, if the stated requirements are satisfied. Variegated features of a deeming provision have been discussed by this Court in the case of Pioneer Urban (supra) with reference to several of the past decisions, albeit in the context of such deeming expression occurring in the Explanation added to Sub-clause (f) of Section 5(8) of the Code 39 . We may usefully extract some of the relevant passages from the said decision in Pioneer Urban as follows: 19.2.1. As regards construction of a deeming fiction, this Court pointed out the basic and settled principles in the following: 88. In every case in which a deeming fiction is to be construed, the observations of Lord Asquith in a concurring judgment in East End Dwellings Co. Ltd. v. Finsbury Borough Council 1952 AC 109 (HL) are cited. These observations read as follows: (AC pp. 132-133) If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sense, impossible. (Per Lord Radcliffe in St. Aubyn v. Attorney General 1952 AC 15 (HL), AC p. 53) 14. 'Deemed', as used in statutory definitions [is meant] 'to extend the denotation of the defined term to things it would not in ordinary parlance denote, is often a convenient devise for reducing the verbiage of an enactment, but that does not mean that wherever it is used it has that effect; to deem means simply to judge or reach a conclusion about something, and the words deem and deemed when used in a statute thus simply state the effect or meaning which some matter or thing has -- the way in which it is to be adjudged; this need not import artificiality or fiction; it may simply be the statement of an undisputable conclusion.' (Per Windener, J. in Hunter Douglas Australia Pty. v. Perma Blinds (1970) 44 Aust LJ R 257) 15. When a thing is to be deemed something else, it is to be treated as that something else with the attendant consequences, but it is not that something else (per Cave, J., in R. v. Norfolk County Court (1891) 60 LJ QB 379). 'When a statute gives a definition and then adds that certain things shall be deemed to be cover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebtor ors 40 transferee or resulting in acquisition of new value for the corporate debtor. Net concentrate of Section 43 19.5. Thus, the net concentrate of Section 43 is that 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), 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. 20. The analysis foregoing leads to the position that 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 guar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may not be necessary for the present purpose, relevant it is to notice that JIL was declared NPA by Life Insurance Corporation of India on 30.09.2015 and by some of its other lenders on 31.03.2016. Then, IDBI Bank Limited instituted a petition Under Section 7 of the Code before NCLT, seeking initiation of Corporate Insolvency Resolution Process against JIL, while alleging that JIL had committed a default to the tune of Rs. 526.11 crores in repayment of its dues. On 09.08.2017, NCLT passed an order Under Section 7 of the Code and appointed an Interim Resolution Professional 41-42 . The IRP made an application on 06.02.2018, seeking directions that the transactions entered into by the directors and promoters of corporate debtor creating mortgages of 858 acres of immovable property owned by it to secure the debts of JAL are preferential, undervalued, wrongful, and fraudulent; and hence, the security interest created by corporate debtor JIL in favour of the lenders of JAL be discharged and such properties be deemed to be vested in corporate debtor. The NCLT allowed the said application on 16.05.2018 with respect to six of the impugned transactions covering about 758 acres of land. On t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be decisive of the question of the ultimate beneficiary of these transactions. The mortgage deeds in question, entered by the corporate debtor JIL to secure the debts of JAL, obviously, amount to creation of security interest to the benefit of JAL. 22.2.2. Now, the capacity of JAL is admittedly that of the holding company of JIL as its largest equity shareholder (with approximately 71.64% shareholding). Moreover, JAL had admittedly been the operational creditor of JIL, for an amount of approximately Rs. 261.77 crores. JAL itself maintains that it had been providing financial, technical and strategic support to JIL in various ways. It is the assertion that apart from making investment in terms of equity shareholding to the tune of Rs. 995 crores, JAL had pledged its 70,83,56,087 equity shares held in JIL in favour of the lenders of JIL; had also entered into Promoter Support Agreement to the lenders of JIL to meet the DSRA obligation of JIL towards its lenders; and had further extended Bank Guarantees of Rs. 212 crores to meet the DSRA obligation of JIL. These assertions, in our view, put JAL in such capacity that it is a related party to JIL and is a creditor as also surety of J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusion, of the other creditors and stakeholders of the corporate debtor JIL. 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. 22.5. Therefore, in relation to the present case, the answers to questions (i), (ii) and (iii) as referred in paragraph 20 are that: the impugned transactions had been of transfers for the benefit of JAL, who is a related party of the corporate debtor JIL and is its creditor and surety by virtue of antecedent operational debts as also other facilities extended by it; and the impugned transactions have the effect of putting JAL in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53 of the Code. Thus, the corporate debtor JIL has given a preference in the manner laid down in Sub-section (2) of Section 43 of the Code. The requirements of Sub-section (4) of Section 43 IBC - related party and look-back period 23. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well-advised secured lenders. 23.1. Before examining as to whether the questioned preferences were given at the relevant time as specified in Sub-section (4) of Section 43, we may deal with one part of the submissions made on behalf of some of the Respondents that in view of the look-back periods provided in Sub-section (4), the provisions of Section 43 of the Code, by their very nature, would come into operation at least one year after the enactment of the Code and else, it would be giving retrospective effect to these provisions which is not permissible. The submissions, in our view, remain bereft of substance. 23.1.1. The scheme of IBC 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. Such provisions as contained in Sections 43 and 44 came into operation as the comprehensive scheme o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re Section 43 for a period of two years! That cannot be and had never been the intention of legislature. It is also noteworthy that 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. Such contentions being totally devoid of substance, deserve to be, and are, rejected. 24. We may now take up the question as to which of the transactions in question would entail in giving preference at a relevant time or otherwise. As noticed, the preference is given to JAL who is a related party of JIL. Hence, the look-back period is two years preceding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put under mortgage initially on 12.05.2014, was released on 07.03.2017 and was re-mortgaged on this very date 07.03.2017. As regards Property No. 5, it is alleged that the same was put under mortgage initially on 24.06.2009, the mortgage was extended on 27.11.2012 and on 23.03.2013; it was released on 04.11.2015 and was re-mortgaged on 24.05.2016. 24.3.1. It has been one of the major contentions of the Respondents that most of the impugned transactions were not of creation of any new encumbrance by JIL and in fact, most of the properties in question had already been under mortgage with the respective lenders. The submissions of Respondents in relation to the aforesaid five transactions, that they had been of so-called re-mortgage/s, carry their own shortcomings and cannot be accepted. In the first place, we are clearly of the view that 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been discussed hereinabove, the conclusion is inevitable that the impugned preference was given to a related party during a relevant time. However, before concluding on this part of discussion, we may also observe that reference to the decisions of Madras and Bombay High Courts in the case of IDBI Bank Ltd. and Monarch Enterprises respectively, is neither apposite nor advances the cause of the Respondents for the reason that the said decisions had essentially been on the question/s as to whether the impugned transactions were of fraudulent preference per Section 531 or lacking in good faith per Section 531A of the Companies Act, 1956. In fact, in the case of IDBI Bank (supra) the corporate debtor attempted to transfer one of its property to the Appellant bank, who was one of its creditors and in that regard, certain transactions like agreement for sale and handing over possession were suggested and it was alleged that the contract for sale was partly performed about one year and four months prior to the winding-up proceedings; and such being beyond the look-back period of six months as envisaged by Section 531 of the Companies Act, 1956, it was argued that it had not been a fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of the Appellants has been that the expression or occurring in Clause (a) of Sub-section (3) of Section 43, seemingly disjunctive of corporate debtor on one hand and transferee on the other, is required to be read as and so as to be conjunctive and covering only the transfers made in the ordinary course of business or financial affairs of the corporate debtor and the transferee. It is submitted on behalf of the Appellants that such mortgage transactions had neither been in the ordinary course of business or financial affairs of the corporate debtor JIL nor secure new value in the property acquired by the corporate debtor and hence, are not excepted transactions within the meaning of Sub-section (3) of Section 43 of the Code. 25.1. Having taken into comprehension the scheme of the Code and the purpose and purport of the provisions contained in Section 43, we find force and substance in the submissions made on behalf of the Appellants. 25.2. As noticed, in the scheme of such provisions in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in our view, the purport of Clause (a) of Sub-section (3) of Section 43 is also principally directed towards the corporate debtor's dealings. In other words, 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. 25.3. Needless to reiterate that 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. It has rightly been contended on behalf of the Appellants that for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 25.6. The result of discussion in the foregoing paragraphs is that the transfers in question could be considered outside the purview of Sub-section (2) of Section 43 of the Code only if it could be shown that same were made in the 'ordinary course of business or financial affairs' of the corporate debtor JIL and the transferees. Even if transferees submit that such transfers had been in the ordinary course of their business, the question would still remain if the transfers were made in the ordinary course of business or financial affairs of the corporate debto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising out of 'any special or particular situation', as rightly expressed in Downs Distributing Co. (supra). Though we may assume 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, we have not an iota of doubt that the impugned transactions do not fall within the ordinary course of business of the corporate debtor JIL. As noticed, the corporate debtor has been promoted as a special purpose vehicle by JAL for construction and operation of Yamuna Expressway and for development of the parcels of land along with the expressway for residential, commercial and other use. It is difficult to even surmise that the business of JIL, 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 JIL that it would create encumbrances over its properties to secure the debts of its holding co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has only been noted to be rejected. 26.1. It needs hardly any emphasis that in the ordinary course of their 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' 44 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 bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence if it falls in either or both of the exceptions provided by Sub-section (3) of Section 43. 28.1. Looking to the legal fictions created by Section 43 and looking to the duties and responsibilities per Section 25, in our view, for the purpose of application of Section 43 of the Code in any insolvency resolution process, what a resolution professional is ordinarily required to do could be illustrated as follows: 1. In the first place, the resolution professional shall have to take two major but distinct steps. One shall be of sifting through the entire cargo of transactions relating to the property or an interest thereof of the corporate debtor backwards from the date of commencement of insolvency and up to the preceding two years. The other distinct step shall be of identifying the persons involved in such transactions and of putting them in two categories; one being of the persons who fall within the definition of 'related party' in terms of Section 5(24) of the Code and another of the remaining persons. 2. In the next step, the resolution professional ought to identify as to in which of the said transactions of preceding two years, the beneficiary is a relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shall be required to apply to the Adjudicating Authority for necessary order/s in relation to the transaction/s that had passed through all the positive tests of Sub-section (4) and Sub-section (2) as also negative test of Sub-section (3). 28.2. On a motion made by the resolution professional after and in terms of the exercise aforesaid, the Adjudicating Authority, in its turn, shall have to examine if the referred transaction answers to all the descriptions noted above and shall then decide as to what order is required to be passed, for avoidance of the impugned transaction or otherwise. 28.3. In our view, looking to the legal fictions created by Section 43 and looking to the duties and responsibilities of the resolution professional and the Adjudicating Authority, ordinarily an adherence to the process illustrated hereinabove shall ensure reasonable clarity and less confusion; and would aid in optimum utilization of time in any insolvency resolution process. Other aspects of the application made by IRP - allegations of transactions being undervalued and fraudulent 29. Having found that the transactions in question cannot be countenanced, for being of preference duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, 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. 29.2. In the present case, it is noticed that NCLT in its detailed and considered order essentially dealt with the features of the transaction in question being preferential at a relevant time but recorded combined findings on all these three aspects that the impugned transactions were preferential, undervalued and fraudulent. Appropriate it would have been to deal with all these aspects separately and distinctively. 29.3. We are conscious of the fact that IBC is comparatively a new legislation and various aspects expected therein are in the progression of taking proper shape, particularly in the adjudicatory processes envisaged. Having said so, we would leave this aspect at that only, while expecting all the concerned to be more attentive to the scheme, object and req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art from raising other contentions, has also questioned this aspect of the order impugned that the aforesaid two appeals, involving the issue as to whether the mortgagees of the corporate debtor could be taken as financial creditors, have been allowed by NCLAT without recording any findings and without any discussion in that regard. 31.3. Though, ordinarily, such omission in the impugned order dated 01.08.2019 might have resulted in the matter being remitted to the Appellate Tribunal for appropriate consideration and finding but, as aforesaid, in the entire process, adherence to the time limit is also of significance; and in view of the fact that learned Counsel for the respective parties have advanced elaborate submissions on the merits of the issue as to whether such lenders of JAL could be treated as financial creditors of the corporate debtor JIL and have invited the decision of this Court, we deem it just, proper and expedient to finally decide the relevant questions in this regard. 31.4. We may, of course, reiterate that in view of the conclusion that we have reached in relation to the principal issue, the transactions in question are denuded of their value and worth, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in favour of Applicant bank, the debt amount can be realized from the sale of the mortgaged property but not from the corporate debtor, i.e. Jaypee Infratech Ltd. *** *** *** 9.2 In this case, the applicant has not disbursed the debt along with interest against the consideration for the time value of money. It is also not the case of the applicant that the corporate debtor has borrowed money against payment of interest from the applicant. It is also not the case that the corporate debtor has raised any amount from the applicant under any credit facility. It is not the case of the applicant that there is any liability towards the corporate debtor in respect of any lease or higher purchase contract. It is further not the case of an applicant that any receivables been sold or discounted. It is further not the case of the applicant that any amount has been raised for the corporate debtor under any other transaction having the commercial effect of borrowing to the corporate debtor. It is not the case of the applicant that any derivative transaction has been entered with the corporate debtor. It is also not the case of the applicant that any counter indemnity obligation in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans granted by the applicant to JAL. The definition of Mortgage Debt as per the mortgage deed dated 7th March 2017 is as under: Mortgage debt shall mean the principal amount of the facility, all interest therein additional interest, default interest, liquidated damages, fees, costs, charges, expenses, any other amounts due and payable to secured parties under the transaction documents, premia on prepayment, costs, charges, and expenses and other monies whatsoever stipulated in or payable together with other debts and liabilities of JAL to lender under the transaction document and/or these presents. It is important to point out that Section 124 of the Indian Contract Act defines a Contract of Indemnity as being a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. In the instant case, as per the Mortgage deed the repayment obligation of the loan granted to JAL by the applicant is upon JAL as stated above and therefore, no contract of indemnity as claimed by the applicant has been entered even by conduct of the corporate debtor, and therefore, the contention of the applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted by NCLT on 15.05.2018, while following the earlier order dated 09.05.2018. 34. As noticed, the aforesaid orders dated 09.05.2018 and 15.05.2018 were questioned in two appeals before NCLAT by the said lenders of JAL; and the said appeals stand allowed in the impugned order dated 01.08.2019 without any discussion as regards the issue involved therein. We have heard learned Counsel for the parties at length in relation to this issue too, and, in the circumstances of the case, as noticed, we had indicated prima facie view in the order dated 10.12.2019 45 , that such lenders of JAL cannot be categorised as financial creditors of JIL and had stayed the operation of impugned order to that extent. Rival submissions 35. Having noticed the relevant background, we may now take note of the contentions of learned Counsel for the parties in regard to the issue under consideration. Submissions on behalf of the Appellant 36. It has essentially been argued on behalf of the Appellant IIFCL that as per Sub-section (7) of Section 5 of the Code, only such creditor could be the 'financial creditor' of the corporate debtor to whom a 'financial debt' is owed by the corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orate debtor; and who would also engage in restructuring of debts and reorganising the corporate business in case of financial stress. With reference to the case at hand, it is submitted that mere holding of security interest, not meant for direct disbursement of any credit to corporate debtor JIL, cannot convert the lenders of JAL into the financial creditors of JIL. 36.2.1. It is also contended that the Respondents, the lenders of JAL to whom mortgages were extended by the corporate debtor JIL, could at best be construed as plain creditors, who are entitled to file Form F and to specify their security in column 8 thereof; and in any case, they cannot become financial creditors of JIL. 36.2.2. It is further contended that a secured creditor under the Code can be a financial creditor under two circumstances i.e., (i) when corporate debtor directly avails a debt from the creditor and such a debt is a secured debt; and (ii) if corporate debtor furnishes a guarantee to any person. Learned Counsel for the Appellant submits that a mortgagee, who has not disbursed any debt to the corporate debtor, may be a secured creditor because of the corporate debtor creating a security to secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surrounding factors, it cannot be inferred that JIL undertook the liability to discharge the indebtedness of JAL when it was itself reeling under financial stress, was declared NPA and had surmounting liabilities towards home buyers and its own lenders. With reference to the financial statements of JIL, it is pointed out that therein, it was specifically disclosed that the mortgages had been provided as a security for the financial assistance availed by JAL but such mortgages were not declared either as contingent or as direct liability. It is also submitted that the common loan agreement between JIL and its lenders, including the Appellant, contained negative covenants prohibiting JIL from creating, assuming or incurring any additional indebtedness or from encumbering any property or creating any security on the assets of JIL. The sum and substance of such submissions had been that the corporate debtor JIL could have neither incurred a liability to discharge the indebtedness of JAL nor it had done so under the mortgages in question. 36.5. As regards the decision of this Court in Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is based on the notion that creditors with similar legal rights should be treated evenly while receiving distribution in accordance with their relative ranking and interest. It is submitted that Essar Steel cannot be read as laying down the law that even the lenders of third party, who hold mortgages from the corporate debtor, be also treated as such secured creditors who would fall within the sect of 'financial creditors'. 36.6. Learned Counsel for the Appellant would further submit that existence of a security interest is not relevant while construing whether a creditor is financial creditor or not because, in the composition of CoC, even a non-secured creditor could also be a financial creditor, if the ingredients of Section 5(8) of the Code are satisfied. It is also argued that the financial facilities availed by JAL from the Respondents were not utilized for any business operation of JIL and hence, the Respondents cannot be construed as financial creditors of JIL. Submissions on behalf of Respondents 37. Learned Counsel for the contesting Respondents have made elaborate submissions in support of the counter-assertion that on account of security provided by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther than the borrower, can also execute a mortgage to secure the debt of the borrower. In this context, learned Counsel for the Respondent has also relied upon the provisions contained in Section 126 of the Contract Act, to contend that JIL stands in the position of a guarantor for the debts owed by JAL. The learned Counsel has also referred to an 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., wherein it is held that a third party mortgagor, who mortgages the property to secure the financial obligation of another party, stands in the position of a guarantor; and the mortgagee is a financial creditor of the third party mortgagor. In the case at hand, it is submitted, the corporate debtor JIL stands in the position of a guarantor with respect to the security provided to this Respondent and hence, the impugned mortgage transactions are covered within the meaning of Section 5(8)(i) of the Code. 37.1.2. It is also submitted that looking to the nature of transaction in question, the question whether JAL has defaulted on repayment and cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the debts/liabilities owed by JAL in accordance with the terms and conditions of the secured financing documents executed between this Respondent and JAL 49 . Hence, it is contended that though the claim of this Respondent is limited to the extent of the value of the properties mentioned in the Schedule to the Mortgage Deed but, to that extent, it remains a financial creditor of JIL. 37.3.1. As regards similar arguments with respect to Section 58 of the Transfer of Property Act, that a mortgage presupposes the subsistence of a debt and hence it is a secured debt, apart from above referred decisions, learned Counsel has also referred to the decision in Pomal Khanji Govindji and Ors. v. Brajlal Karsandas Purohit and Ors. (1989) 1 SCC 458. 37.3.2. It is contended that when the objective of the Code is to revive the corporate debtor, the resolution plan ought to contain all claims against the corporate debtor, whether matured or not, so that if the liability again creeps in, the Company may be prevented from being dragged into insolvency or liquidation proceedings. It is further submitted that this Respondent, who is holding public money, ought to be a part of CoC; and its absen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... category of 'financial creditors'. 37.4.2. With reference to the duties of IRP as laid out in the Code, and with analysis of the definition of 'claim' as found in Section 3(6) of the Code, it is submitted that the definition of 'claim' is wide enough to include all stakeholders of the corporate debtor, even if a claim had not matured on the date of insolvency commencement. The Report of Banking Law Reform Committee has also been referred in this regard. 37.4.3. It is further submitted that Regulations 12, 13 and 14 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 require the IRP to admit all claims, including contingent claims, as on the insolvency commencement date; that as per Section 29 of the Code, the IRP ought to prepare an information memorandum for formulating a resolution plan; that as per Regulation 37 of CIRP Regulations, the insolvency resolution of the corporate debtor should include sale of all or part of the assets, irrespective of whether they are subject to security interest and satisfaction or modification of any security interest; and that Sub-section (4) of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Court in several decisions, including those in the above-mentioned cases of Swiss Ribbons (decided on 25.01.2019), Pioneer Urban (decided on 09.08.2019) and Essar Steel (decided on 15.11.2019), which have been referred to and relied upon by learned Counsel for the parties for one proposition or another. In fact, the observations as occurring in the last of the said decisions, in the case of Essar Steel, as relied upon by the learned Counsel for the Respondents, are based on those occurring in the decision in Swiss Ribbons 51 . 39. As indicated hereinbefore, the law declared by this Court in the case of Swiss Ribbons, while rejecting the contentions that classification between financial creditor and operational creditor was discriminatory and violative of Article 14, shall have some bearing on the claim of the Respondent-lenders for being treated as financial creditors of JIL. Having regard to the submissions made, it shall now be pertinent to take note of the relevant aspects from the said decision in requisite details. 39.1. The broad features of the expressions used in Sections 5(7) and 5(8) of the Code in defining the terms financial creditor and financial debt w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le financial creditors to recall a loan in totality. Contracts with operational creditors do not have any such stipulations. Also, the forum in which dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately. Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well documented and defaults made are easily verifiable. 51. Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganisation of the corporate debtor's business when there is financial stress, which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the well-being of the corporate debtor. Financial debt-ratio of Pioneer Urban 40. Having imbibed the basic features associated with a 'financial creditor', we need to examine as to who could at all fall in this category. In order to address this core question, delving into the finer connotations of the expression financial debt , as defined in Section 5(8) of the Code is, obviously, necessary. As noticed, while defining 'financial creditor' and 'financial debt' in Section 5(7) and Section 5(8) of the Code, both the expressions means and includes have been used. As per the definition, while financial creditor means a person to whom a financial debt is owed, it also includes a person to whom such debt has been legally assigned or transferred to. Obviously, a comprehension of this definition of financial creditor cannot be complete without taking into account as to what is the meaning assigned to the expression financial debt . Again, the term financial debt has also been defined with the expressions means and includes . A financial debt means a debt along with interest, if any, which is disbursed against the consideration for the tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Sub-clause (f) of Section 5(8) of the Code and with the co-related insertion of Sub-section (6A) to Section 21 as also with further insertion of Section 25-A in the Code. These amendments were under challenge in Pioneer Urban. Several contentions were urged before this Court questioning the treatment of allottees as financial creditors. In this context and in the wake of such issues this Court dealt with the contentions related with Section 5(8), particularly Sub-clause (f) thereof. The relevant part of the consideration of this Court in Pioneer Urban under the heading 'Interpretation of Section 5(8)(f) of the Code' needs to be noticed and is extracted as under: 66. Section 5(8)(f) of the Code has been set out in the beginning of this judgment. What has been argued by learned Counsel on behalf of the Petitioners is that Section 5(8)(f), as it originally stood, is an exhaustive provision which must be read noscitur a sociis, and if so read, Sub-clause (f) must take colour from the other clauses of the provision, all of which show that the sine qua non of a financial debt is a loan of money made with or without interest, which must then be returned as money. This, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar (2nd Edn., Reprint) are quoted. 70. The definition of financial debt in Section 5(8) then goes on to state that a debt must be disbursed against the consideration for time value of money. Disbursement is defined in Black's Law Dictionary (10th Edn.) to mean: 1. The act of paying out money, commonly from a fund or in settlement of a debt or account payable. 2. The money so paid; an amount of money given for a particular purpose. 71. In the present context, it is clear that the expression disburse would refer to the payment of instalments by the allottee to the real estate developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a flat/apartment. The expression disbursed refers to money which has been paid against consideration for the time value of money . In short, the disbursal must be money and must be against consideration for the time value of money , meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money. Thus far, it is clear that an allottee disburses money in the form of advance payments made towards construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the corporate debtor and would thus clearly include the kind of financing arrangement by allottees to real estate developers when they pay instalments at various stages of construction, so that they themselves then fund the project either partially or completely. 76. Sub-clause (f) Section 5(8) thus read would subsume within it amounts raised under transactions which are not necessarily loan transactions, so long as they have the commercial effect of a borrowing. We were referred to Collins English Dictionary Thesaurus (2nd Edn., 2000) for the meaning of the expression borrow and the meaning of the expression commercial . They are set out hereinbelow: borrow-vb 1. to obtain or receive (something, such as money) on loan for temporary use, intending to give it, or something equivalent back to the lender. 2. to adopt (ideas, words, etc.) from another source; appropriate. 3. Not standard. to lend. 4. (intr) Golf. To putt the ball uphill of the direct path to the hole: make sure you borrow enough. *** *** *** commercial. -adj. 1. of or engaged in commerce. 2. sponsored or paid for by an advertiser: commercial television. 3. having profit as the main aim: commercial m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the allottees, they would fall within Section 5(8)(f) of the Code as originally enacted. 41.1.1. It is, therefore, evident that this Court, even while interpreting Sub-clause (f) of Section 5(8) on the question as to whether an allottee under a real estate project could fall thereunder, analysed the gamut of the relevant expressions of 'disbursement', 'borrowing' and 'time value of money', being the root ingredients of 'financial debt' within the meaning of the Code. 41.1.2. It is significant to notice that in the case of Pioneer Urban, one line of arguments on behalf of the Petitioners, who led challenge to the amendments, had been that the use of expression means and includes in Section 5(8) was indicative that the provision was exhaustive and in that position, alien subject-matter such as home buyers could not have been inserted therein. The decision of this Court in the case of P. Kasilingam and Ors. v. P.S.G. College of Technology and Ors. (1995) Suppl. 2 SCC 348 was relied upon by the Petitioners wherein, this Court had rejected an argument that the expression means and includes indicated that the definition was inclusive in nature a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes Sub-clauses (a) to (i), was also not accepted as a matter of statutory interpretation while observing that the expression and includes speaks of the subject matter which may not necessarily be reflected in the main part of the definition. These observations of the Court, after reproduction of the relevant extracts from the referred decisions, read as under: 82. This statement of the law, as can be seen from the quotation hereinabove, is without citation of any authority. In fact, in Jagir Singh v. State of Bihar (1976) 2 SCC 942 at paras 11 and 19 to 21 and Mahalakshmi Oil Mills v. State of A.P. (1989) 1 SCC 164, at paras 8 and 11 (which has been cited in P. Kasilingam 1995 Supp (2) SCC 348) this Court set out definition Sections where the expression means was followed by some words, after which came the expression and includes followed by other words, just as in the Krishi Utpadan Mandi Samiti case 1993 Supp (3) SCC 361 (2). In two other recent judgments, Bharat Coop. Bank (Mumbai) Ltd. v. Employees Union (2007) 4 SCC 685, at paras 12 and 23 and State of W.B. v. Associated Contractors (2015) 1 SCC 32 at para 14, this Court has held that wherever the expression means ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to be clarificatory in nature so as to put beyond doubt that allottees are to be regarded as financial creditors within the enacting part of Section 5(8)(f) of the Code. The Amendment Act was upheld with this Court holding as under: 96. In the present case, it is clear that the deeming fiction that is used by the Explanation is to put beyond doubt the fact that allottees are to be regarded as financial creditors within the enacting part contained in Section 5(8)(f) of the Code. 97. It was also argued that an explanation does not enlarge the scope of the original Section and for this purpose S. Sundaram Pillai (1985) 1 SCC 591 was relied upon. This very judgment recognises, in para 46, that an explanation does not ordinarily enlarge the scope of the original section. But if it does, effect must be given to the legislative intent notwithstanding the fact that the legislature has named a provision as an explanation. [See Hiralal Ratanlal v. State of U.P. (1973) 1 SCC 216 at p. 225, followed in para 51 of Sundram Pillai]. In any case, it has been found by us that the Explanation was added by the Amendment Act only to clarify doubts that had arisen as to whether homebuyers/al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the ipsissima verba of Willes, J., as though they were part of an Act of Parliament and applying the Rules of interpretation appropriate thereto. This is not to detract from the great weight to be given to the language actually used by that most distinguished Judge. 20. In Home Office v. Dorset Yacht Co. (1970) 2 All ER 294 Lord Reid said (at All ER p. 297g-h), Lord Atkin's speech ... is not to be treated as if it were a statutory definition. It will require qualification in new circumstances . Megarry, J. in (1971) 1 WLR 1062 observed: One must not, of course, construe even a reserved judgment of even Russell, L.J. as if it were an Act of Parliament. And, in Herrington v. British Railways Board (1972) 2 WLR 537 Lord Morris said: (All ER p. 761c) There is always peril in treating the words of a speech or a judgment as though they were words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case. 21. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases. Disposal of cases by blindly placing reliance on a decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted by this Court; and the statement of law in Krishi Utapadan Mandi Samiti was held to be not that of good law for it ignored the earlier precedents of larger and coordinate Benches and was also out of sync with the later decisions on the same point. However, the other extreme of interpretation, as canvassed by the Petitioners, that a financial debt could only be a debt which is disbursed against the consideration for the time value of money, and such requirement pervades all Sub-clauses (a) to (i), was also not accepted as a matter of statutory interpretation by this Court while observing that the expression 'and includes' speaks of subject matters which may not necessarily be reflected in the main part of the definition. Thus, it is evident that this Court did not accept either of the extremities suggested by the parties in Pioneer Urban for interpretation and implication of the expressions 'means and includes' in a definition Clause of the statute. Significantly, in Pioneer Urban, none of the extremities had any bearing on the conclusion because, eventually, the amendment in question was held to be only clarificatory in nature; and this Court held that the Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technical Education in accordance with the directions issued by the AICTE from time to time. 26. In Bharat Coop. Bank (Mumbai) Ltd. v. Employees Union (2007) 4 SCC 685 this Court again considered the difference between the inclusive and exhaustive definitions and observed: (SCC p. 695, para 23) 23. ... when in the definition Clause given in any statute the word 'means' is used, what follows is intended to speak exhaustively. When the word 'means' is used in the definition ... it is a 'hard-and-fast' definition and no meaning other than that which is put in the definition can be assigned to the same. ... On the other hand, when the word 'includes' is used in the definition, the legislature does not intend to restrict the definition: it makes the definition enumerative but not exhaustive. That is to say, the term defined will retain its ordinary meaning but its scope would be extended to bring within it matters, which in its ordinary meaning may or may not comprise. Therefore, the use of the word 'means' followed by the word 'includes' in [the definition of 'banking company' in] Section 2(bb) of the ID Act is clearly indic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 25 of that Act. On the other hand, the 1941 Act is a general statute providing for multipoint levy of sales tax on commodities not covered by the 1954 Act. Sub-clause (d) of Section 2 of the 1954 Act reads as follows: 2. (d) 'sale-price' used in relation to a dealer means the amount of the money consideration for the sale of notified commodities manufactured, made or processed by him in West Bengal, or brought by him into West Bengal from any place outside West Bengal, for the purpose of sale in West Bengal, less any sum allowed as cash discount according to trade practice, but includes any sum charged for containers or other materials for the packaging of notified commodities; (emphasis supplied) 6. We shall first deal with the contention of the Appellants' counsel based upon the non-inclusion of freight charges in the definition of sale price in Section 2(d) of the 1954 Act. 7. It is clear that the definition of sale price in Section 2(d) uses the words means and includes . The first part of the definition defines the meaning of the word sale price and must, in our view, be given its ordinary, popular or natural meaning. The interpretation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alling 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. In yet other words, 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. 44. As noticed, 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. 45. It is also evident that what is being dealt with and described in Section 5(7) and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reditor', '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. As noticed, 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. 47. 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 when there is financial stress. In other words, the financial creditor, by its own direct involvement in a functional existence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 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 48. 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. 49. Though several decisions have been cited on behalf of the Respondent-lenders to contend that they do fall within the definition of 'financial creditor' but for what has been discussed hereinabove, it does not appear necessary to dilate upon all of them. However, it would be appropriate to take note of the relevant decisions strongly relied upon by the Respondents as infra. 50. Much emphasis is lai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors which are then used as working capital, and often get paid for goods and services provided by them to the corporate debtor, out of such working capital. On the other hand, market research carried out by India Brand Equity Foundation, a trust established by the Ministry of Commerce and Industry, as regards the Oil and Gas sector, has stated that the business risk of operational creditors who operate with higher profit margins and shorter cyclical repayments must needs be higher. Also, operational creditors have an immediate exit option, by stopping supply to the corporate debtor, once corporate debtors start defaulting in payment. Financial creditors may exit on their long-term loans, either upon repayment of the full amount or upon default, by recalling the entire loan facility and/or enforcing the security interest which is a time consuming and lengthy process which usually involves litigation. Financial creditors are also part of a regulated banking system which involves not merely declaring defaulters as non-performing assets but also involves restructuring such loans which often results in foregoing unpaid amounts of interest either wholly or partially. All these differenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Creditors with the discretion of accepting resolution plans only with financial creditors, operational creditors having no vote, the Code itself differentiates between the two types of creditors for the reasons given above. Further, as has been reflected in Swiss Ribbons (supra), most financial creditors are secured creditors, whose security interests must be protected in order that they do not go ahead and realise their security in legal proceedings, but instead are incentivised to act within the framework of the Code as persons who will resolve stressed assets and bring a corporate debtor back to its feet. Shri Sibal's argument that the expression secured creditor does not find mention in Chapter II of the Code, which deals with the resolution process, and is only found in Chapter III, which deals with liquidation, is for the reason that secured creditors as a class are subsumed in the class of financial creditors, as has been held in Swiss Ribbons (supra). Indeed, Regulation 13(1) of the 2016 Regulations mandates that when the resolution professional verifies claims, the security interest of secured creditors is also looked at and gets taken care of.... 50.3. While ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een repeatedly referred by the Respondents in support of their contentions that because of the transactions of mortgage, the corporate debtor JIL owes them the mortgage debt as a guarantee obligation and hence, it falls within the ambit of 'financial debt' within the meaning of Section 5(8) of the Code. 51.1. We may have a close look at the relevant background aspects of the said case of Smt. Kusum. Therein, the Appellant-bank had advanced a loan to the firm of which, husband of the Respondent was the proprietor. The Respondent had executed an agreement in favour of the Appellant-bank to the effect that so long as her husband's firm was indebted to the bank, she would execute, by way of collateral security, a legal mortgage of the immoveable property, being a flat belonging to her, with or without possession, in favour of the bank within 14 days of issuance of written requisition for such execution. Later on, when the bank called upon the Respondent to execute the mortgage as per the agreement, she declined to do so and hence, a suit for specific performance and in the alternative for damages was filed by the Appellant-bank. The Trial Court, however, dismissed the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and creditor, the mortgage being a security for the debt. The learned trial Judge has also held that there was no consideration for giving this promise of executing the mortgage. Both these aspects are interrelated. By making the promise by Ex. 20, Defendant has agreed to provide collateral security of a legal mortgage to secure repayment of all the moneys due from Nitin Pharmaceuticals. Thus, the Defendant has promised to discharge the liability of a third person (the debtor) in case of his default. This guarantee is limited to the security offered by the promisor, namely, the mortgage and no further personal liability is taken by the promisor. Thus, the promisor has became a surety and this would be an agreement to offer security for due performance of that promise and to that extent. Sections 126, 127 and 128 of the Contract Act read as follows: *** *** *** 13. The liability of the surety is co-extensive with that of-the debtors. However, in the present case, the liability of the surety is as otherwise provided by the contract Ex. 20. Therefore, the liability of the Defendant is as provided in the agreement and to that extent of securing dues by a creation of mortgage, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... *** *** *** 21. Thus, the Plaintiff not enforcing the claim against the principal debtor or even the third person may be sufficient consideration by the debtor or third person to give security for the debt and the consideration for such promise is that by such forbearance, the creditor is delayed and the debtor or third party is benefited. It is also seen that even in absence of express promise to forbear, a simple forbearance from enforcing the claim can be held to have been implied in the present case. This promise and agreement was given in 1975 and it is clear that thereafter for two years, the claim was not pressed which shows that there is actual forbearance against the principal debtor after this Ex. 20 was executed. Thus, even under the English Law, this consideration is held to be good and sufficient consideration. Under Indian Law, which is significantly different from English Law of Contract, past consideration or the consideration towards third person is statutorily held to be good consideration as defined in Section 2(d) and as mentioned in Section 127 of the Contract Act. The observation of the learned trial Judge that as the husband of the Defendant had to pay Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditors who may claim to be falling within the terminology 'secured creditors', yet cannot become 'financial creditors' of the corporate debtor JIL who is not owing any 'financial debt' to them. The decision in Smt. Kusum does not make out a case in favour of the Respondents, the lenders of JAL. 52. Another decision forming the mainstay of the Respondents had been that in the case of Rajkumari Kaushalya Devi (supra). The relevant background aspects of the said case had been that the Appellant had executed two usufructuary mortgages with respect to the two properties situated in Feroozepore city in favour of the Respondent while also taking the same property on lease on the very same date in 1946. On default in effecting payments by the Appellant, the Respondents filed an application Under Section 13 of the Displaced Persons (Debts Adjustment) Act 70 of 1951 53 seeking recovery of the principal amount together with arrears of rental. While omitting other aspects which may not be relevant, noticeable it is for the present purpose that one of the points for consideration in the case had been as to whether the liability created under the said mortgage was a & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t application in the present case. In any event, the said decision cannot be taken as an authority governing the transaction where there is no direct debt of the mortgagor himself. 53. The other citations, on various terminologies related with mercantile law and mortgage transactions, do not advance the cause of the Respondents because of distinct and rather peculiar requirements of Section 5(8) of the Code. of course, the decision of NCLAT in SREI Infrastructure Finance Limited (supra) stands disapproved for what we have held hereinabove. Equally, the other submissions about the contents of the documents in question as also the entitlement of Respondent-lenders to invoke the security or to take up the proceedings under SARFAESI Act etc. do not, in any event, make the transactions in question 'financial debts' within the meaning of Section 5(8) of the Code. Such submissions have only been noted to be rejected. Summation on second issue 54. For what has been discussed hereinabove, on the issue as to whether lenders of JAL could be treated as financial creditors, we hold that such lenders of JAL, on the strength of the mortgages in question, may fall in the category ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereinafter also referred to as 'Property No. 1' 10 Hereinafter also referred to as 'Property No. 2' 11 Hereinafter also referred to as 'Property No. 3' 12 Hereinafter also referred to as 'Property No. 4' 13 Hereinafter also referred to as 'Property No. 5' 14 Hereinafter also referred to as 'Property No. 6' 15 Hereinafter also referred to as 'Property No. 7' (As regards this description, it is pointed out on behalf of the Respondent ICICI Bank that it had been of 'Term Loan of Rs. 1500 crores under the Corporate Rupee Loan Facility agreement and General Conditions dated 12.12.2013 and mortgage deed was dated 10.03.2014') 16 Being Civil Appeal No. 8437 of 2019 [@ D No. 27229 of 2019] Jaiprakash Associates Ltd. and Anr. v. IDBI Bank Ltd. and connected case 17 It may also be noticed that by another order dated 03.02.2020, while accepting the reasons stated in an application filed by the IRP pointing out various difficulties and unavoidable circumstances which have delayed the culmination of proposal for approval of resolution plan, though submitted within the time frame prescribed by this Court, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-pp. 1369 and 1370 32 It may in the passing be observed that 'an insolvency' essentially refers to financial distress, i.e., financial state in which a person or entity is unable to pay its dues or meet with other akin obligations. Insolvency may be temporary in character. 'A bankruptcy', on the other hand, essentially refers to the legal process to regulate as to how an insolvent entity shall pay off his dues. As noticed, the primary focus of IBC is 'to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation'. In other words, insolvency resolution is the main object; and liquidation with bankruptcy is the last resort. 33 We may also indicate that any attempt by an insolvent, of alienating or encumbering the assets in favour of one person so as to cause harm to the interest of a bona fide creditor had been sternly dealt with by the legislature even in relation to the individuals, as could be readily noticed from the provisions contained in the erstwhile Presidency-Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. These enactments stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing which has the effect of putting that person in a better position in the event of company going into liquidation than the position he would have been in but for such preference prior to six months of making winding up application, the Tribunal, on being satisfied that the transaction was of a fraudulent preference, may order for restoring the position to what it would have been if the preference had not been given. More particularly, as regards transfer of property, it is provided in Sub-section (2) of Section 328 that if the transaction is made six months before winding up application, the Tribunal may declare such transaction invalid and restore the position. 35 Note: Here the expression 'offending' is only to denote the unacceptability of such transaction and not any criminality. 36 It may be intended benefit or may even be unintended benefit 37. Section 53 IBC makes provision for distribution of the proceeds from sale of the liquidation assets, in case of liquidation of the corporate debtor. 38. Whether the expression or , as occurring in between the expressions 'corporate debtor' and 'transferee' in Clause (a) of Sub-section (3) of Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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