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TMI Blog2024 (12) TMI 1152X X X X Extracts X X X X X X X X Extracts X X X X ..... no creditor can recover any dues from the Corporate Debtor. But still, there is a provision for making a claim. Hence, the argument based on moratorium deserves to be rejected. The DoH will continue to be valid. However, on the basis of the DoH, something which is prohibited by Section 14, cannot be done. Therefore, Section 14 will be of no assistance to the 1st respondent-Doha Bank. 64. When we are on the interpretation of DoH, we must refer to sub-clause (vi) of clause 16 of the DoH, which provides that every provision contained in the deed shall be severable and distinct from every other such provision. If the right to payment exists or if a breach of contract gives rise to a right to payment, the definition of claim is attracted. Even if that right cannot be enforced by reason of the applicability of the moratorium, the claim will still exist. Therefore, whether the cause of action for invoking the guarantee has arisen or not is not relevant for considering the definition of claim . Much capital was made of the fact that the CoC, including the appellants as well as the third-party lenders, have voted for the Resolution Plan. At this stage, it is noted that the NCLAT has not he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts in Civil Appeal No. 7298 of 2022. 2. The issue involved in these appeals is whether the appellants can be classified as Financial Creditors within the meaning of sub-section (7) of Section 5 of the Insolvency and Bankruptcy Code, 2016 (for short, the IBC ). Another issue may arise in the event it is held that the appellants are not Financial Creditors . The issue will be whether the appellants can be classified as Secured Creditors and paid commensurate to their security interest. 3. 1st respondent-Doha Bank claims to be a direct lender and secured Financial Creditor of Reliance Infratel Limited (for short, RITL or the Corporate Debtor ). A Corporate Insolvency Resolution Process (CIRP) was initiated by the adjudicating authority (NCLT) in respect of RITL-Corporate Debtor at the instance of Ericsson India Private Limited, and the Interim Resolution Professional (IRP) was appointed. We are concerned in this case with Reliance Communications Infrastructure Ltd. (for short, RCIL ), Reliance Communications Ltd. (for short, RCom ), Reliance Telecom Ltd. (for short, RTL ) and RITL. These companies are hereinafter collectively referred to as RCom entities . 4. Public announcements wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resources to provide security for the facilities availed by any of the entities, ensuring that each entity was individually liable to pay the debt of all the entities. According to the case of the appellants, in terms of the DoH, if there is any default by any entity, all the RCom entities were liable to make good the shortfall in recovery of the amounts after realisation of hypothecated assets. 7. Thereafter, the NCLT heard the application of the 1st respondent and dismissed it, upholding the status of the appellants (except the appellant in Civil Appeal No.7434 of 2023) as the Financial Creditors. An appeal was preferred by 1st to 4th respondents against the said order. By the impugned judgment and order, the NCLAT held that the DoH is not a deed of guarantee. It was held that the only parties to the DoH were the Chargors and the Security Trustee. The only object of the DoH was to create a charge on the property of the Chargors. Therefore, the Chargors cannot be treated as guarantors. Hence, the NCLAT set aside the order passed by the NCLT and remanded the case to the NCLT for taking consequential actions resulting from de-recognising the first four appellants herein as Financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst-ranking pari passu basis for the benefit of the secured creditors, including the appellants and others. The learned senior counsel pointed out that the entire asset pool is the subject matter of the approved Resolution Plan. Thirdly, under sub-clauses (ii) and (iii) of clause 5 of the DoH, the Corporate Debtor unambiguously, unequivocally and expressly agreed to make good the shortfall in realisation of the outstanding debt to the appellants, in the event charged assets were not sufficient to satisfy the outstanding debts owed to the appellants. He submitted that the Corporate Debtor in its capacity as a Chargor, in addition to hypothecating its properties, has undertaken to pay the appellants the amounts due and payable under the relevant facilities granted to RCom and RTL, which amounts to a guarantee in terms of Section 5(8). 12. The learned senior counsel pointed out the findings recorded in paragraph 8 of the order made by the NCLT. Relying upon Section 126 of the Indian Contract Act, 1872 (for short, the Contract Act ), he submitted that a contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of a default. He subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e definition of financial debt under Section 5(8) of the IBC is inclusive and not exhaustive. He relied upon the decisions of this Court in the cases of Kotak Mahindra Bank Limited v. A. Balakrishnan (2022) 9 SCC 186 : 2022 INSC 630 and Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd (2023) 3 SCC 753 : 2021 INSC 359 . He submitted that the debt need not be directly disbursed to the Corporate Debtor. He relied upon another decision of this Court in the case of Maitreya Doshi v. Anand Rathi Global Finance Ltd. Ors AIR 2022 SC 4595 : 2022 INSC 1004 . He submitted that the Security Trustee under the DoH is acting for the benefit of the secured lenders like the appellants who are the direct and intended beneficiaries under the DoH. He submitted that the beneficiary to a contract can enforce such a contract even when it is not a party to the same. He relied upon the decisions of this Court in the cases of M.C. Chacko v. State Bank of Travancore (1969) 2 SCC 343 : 1969 INSC 151 and Essar Steel Ltd. v. Gramercy Emerging Market Fund 2002 SCC OnLine Guj 319 . 17. The learned senior counsel submitted that the entire CIRP of the Corporate Debtor has proceeded on the basis that the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay on the part of the Chargors. He pointed out that clause 5(iii) of the DoH provides protection to the Security Trustee precisely because there is an obligation on the Chargors to pay the shortfall/deficiency in payment of debt. When there are no recoveries from the sale of the charged properties, the entirety of the amount of default by RCom would be rendered in shortfall or deficiency and form part of the Corporate Debtor s liability to pay. He pointed out that in the present case, the Corporate Debtor has not merely provided security for RCom s dues but has also expressly undertaken to pay any shortfall or deficiency that may arise in the recovery of the amounts from RCom following the realisation from the sale of the security. Therefore, clause 5(iii) of the DoH contains the ingredients of a contract of guarantee under Section 126 of the Contract Act. Relying upon the definition of financial debt under Section 5(8) of the IBC, he submitted that the facility availed by RCom undoubtedly falls within the definition of financial debt and especially, clause (a) of sub-section (8) of Section 5 of the IBC. Therefore, the guarantee provided by RITL-Corporate Debtor for such a fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her creditors include those creditors who have a claim against the Corporate Debtor but are neither Financial Creditors nor Operational Creditors. He submitted that while voting in favour of the Resolution Plan, the appellant made it clear that its approval was subject to the appellants being considered as Financial Creditors. Even while approving the Resolution Plan, the NCLT permitted the distribution of the payment to the Financial Creditors including the appellants and stated that the same shall abide by and subject to the outcome of the application filed by the 1st Respondent. 24. The learned senior counsel also relied upon the decision of this Court in the case of Vistra ITCL (India) Ltd.6 to contend that IBC recognises the rights of secured creditors. He submitted that the requirement to relinquish the security interest is only during the liquidation process and not during the CIRP. Therefore, the question of whether the appellant has relinquished its security interest does not arise. Submissions in Civil Appeal no. 7328 of 2022 25. The learned counsel appearing for the appellant in Civil Appeal No. 7328 of 2022 also made detailed submissions which are similar to the submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be sold either in fact or in law. As the hypothecated property could not be sold, there was no question of sale or realisation. As there would not be a shortfall, the question of meeting the shortfall would not arise. 29. The learned counsel further submitted that the enforcement of security is left out of the domain of CIRP as it focuses on revival of a Corporate Debtor as opposed to the process of liquidation. After the moratorium applies, the enforcement of security becomes impossible. 30. The learned senior counsel submitted that the DoH does not contain any promise by the Corporate Debtor to discharge the liability of any of the borrowers to any other lender. As there are no third parties to the document, it cannot be termed as a guarantee. He submitted that clause 5(iii) of the DoH is found in every standard draft of a deed of hypothecation. 31. He submitted that there are other clauses in the DoH, such as clauses 2, 3, 5 and 9, which indicate that the Corporate Debtor has merely created a security in favour of the Security Trustee, which represents the lenders. The Corporate Debtor has not agreed to discharge the obligations of any borrower. The mere security interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IBC and once a Resolution Plan is approved, it cannot be challenged before the forum. 36. The appellants voted and approved the Resolution Plan which extinguished their security while their status as Financial Creditors was under challenge in the pending application filed by the 1st Respondent-Doha Bank. Now, the appellants cannot be permitted to turn back and rewrite the Resolution Plan. The learned senior counsel urged that allowing any member of the CoC to agree to the Resolution Plan by unilaterally reserving its right to seek amendment, would run contrary to fundamental principles of the IBC and set a dangerous precedent. 37. The learned senior counsel submitted that even if the CoC accepts the appellants as Financial Creditors, the same would have no consequence on the CIRP of the Corporate Debtor or the Resolution Plan since the plan has been duly approved by 100 per cent majority of the CoC in conformity with Section 30(2) of the IBC. The learned senior counsel submitted that once the Resolution Plan has been approved by this Court, the appellants cannot be allowed to challenge the same. He submitted that while voting in favour of the Resolution Plan, the appellants opted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 2.1 of the MSTA provides that each Original Obligor appoints the Security Trustee who acts as a trustee for the benefit of the secured parties and their permitted successors, etc. Secured Parties are defined to include the Security Trustee, Secured Lenders and any other persons named as Secured Parties. Therefore, the Security Trustee is appointed by each original Obligor, the RCom entities, to act for the benefit of the Secured Parties, the appellants. 42. Clause 2.2 of the MSTA is relevant. Under the said clause, the Secured Lenders authorised and directed the Security Trustee to act for the benefit of the secured parties, including the Secured Lenders. The authority conferred by clause 2.2 includes the authority to execute and take delivery of the secured documents and to accept the security and all related deeds and documents. It also authorises the Security Trustee to enforce the security in accordance with the provisions of the MSTA. To that extent, the Security Trustee acts on behalf of the appellants, who are Original Lenders. DEEDS OF HYPOTHECATION (DOH) 43. Then comes the DoH, to which RCom entities are shown as Chargors . The Chargors have executed the DoH in favour o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r any part of the Hypothecated Property (including by way or through the exercise of its powers and rights specified in Section 6 hereof) and to enforce, realise, settle, compromise and deal with any rights or claims relating thereto, without being bound to exercise any of these powers or be liable for any losses in the exercise or non-exercise thereof and without prejudice to the Security Trustee's rights and remedies of suit or otherwise. Notwithstanding any pending suit or other proceeding, each of the Chargors undertakes to give possession to the Security Trustee or its nominees or the Receiver within 7 (seven) Business Days of a notice of demand from the Security Trustee and/ or the Receiver the Charged Property and to transfer and to deliver to Security Trustee and/ or the Receiver all related bills, contracts and securities. Each of the Chargors further agrees to accept the Security Trustee's account of sales and realisations as sufficient proof of amounts realised and relative expenses and to pay on demand by the Security Trustee and/ or the Receiver any shortfall or deficiency thereby shown. Provided however, the Security Trustee Or the Receiver shall not be in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured; Sub-section (11) of Section 3 of the IBC defines debt which reads thus: 3. Definitions:- .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. (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; 48. It is necessary to refer to the definitions of Financial Creditor and financial debt under sub-sections (7) and (8) of Section 5 of the IBC respectively, which read thus: 5. Definitions:- .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. (7) Financial Creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; (8) financial debt means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any guarantee of the items referred to in clauses (a) to (h) becomes a financial debt. Therefore, when clause (i) of Section 5(8) is applicable, it is not necessary that the Financial Creditor actually tenders any amount to the Corporate Debtor. In this case, the appellants are claiming that the amount of liability covered by clause (i) is in respect of money borrowed by the RCom entities (excluding the Corporate Debtor) against payment of interest under the facility agreements. There is no dispute that facilities were granted by the appellants to RCom entities. The amount of any liability in respect of any of the guarantees for money borrowed against the payment of interest is a financial debt under Section 5(8) of the IBC. 50. Guarantee is defined under Section 126 of the Contract Act, which reads thus: 126. Contract of guarantee , surety , principal debtor and creditor . A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the surety ; the person in respect of whose default the guarantee is given is called the principal debtor , and the person to whom the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a contract is not determinative of the real nature of the document or of the transaction thereunder. These, however, have to be determined from all the terms and clauses of the document and all the rights and results flowing therefrom and not by picking and choosing certain clauses and the ultimate effect or result as the Court did in the Orient Paper Mills case [State of M.P. v. Orient Paper Mills Ltd., (1977) 2 SCC 77]. This principle was reiterated in Prakash Roadlines (P) Ltd. v. Oriental Fire General Insurance Co. Ltd. [Prakash Roadlines (P) Ltd. v. Oriental Fire General Insurance Co. Ltd., (2000) 10 SCC 64] 55. The task of this Court, therefore is to, upon an overall reading of the materials presented by the parties, discern the true nature of the relationship between the seconded employees and the assessee, and the nature of the service provided in that context by the overseas group company to the assessee. ( emphasis added ) As held in the case of B.K. Muniraju v. State of Karnataka Ors.7, a sentence or a term in a contract does not determine the real nature of the contract. It is true that the Courts should not rewrite the contract while making an attempt to interpret i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurity Documents, each of the Chargors does hereby covenant with the Security Trustee that each Obligor shall repay the Secured Facilities availed by it together with interest, liquidated damages, premia on prepayment, financing charges, remuneration payable to the Security Trustee, fees payable to any Secured Party, costs, charges expenses and all other monies stipulated in the relevant Facility Documents in the manner set out therein and shall duly observe and perform all the terms and conditions of the relevant Facility Documents and/or the other Security Documents. Clause 2 refers to Secured Lenders and Obligors. As noted earlier, the appellants are Secured Lenders within the meaning of the MSTA. The two RCom entities, namely RCom and RTL, are the obligors being the borrowers of the appellants. Therefore, as per clause 2, the appellants had made available the secured facilities to RCom and RTL, who undertook to repay the secured facilities availed by it together with the interest, liquidated damages, premia of prepayment, financing charges, etc., including the remuneration payable to the Security Trustee. As noted earlier, the appellants are Secured Lenders within the meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curity Trustee in terms of sub-clause (c) of clause 2.2.1 of the MSTA. Thus, the security of hypothecation can be enforced by the Security Trustee on behalf of the appellants. 58. Sub-clause (iii) of clause 5 of the DoH further provides that each of the Chargors agree to accept the Security Trustee s account of sales and realisation as sufficient proof of the amount realised and relative expenses and to pay on demand by the Security Trustee and/or receiver any shortfall or deficiency thereby shown. Under the DoH, even the Corporate Debtor hypothecated its goods. The last part of sub-clause (iii) of clause 5 means that if after the sale of hypothecated assets, there is any shortfall in the discharge of the liabilities of RCom or RTL, the Corporate Debtor is under an obligation to pay the shortfall or deficiency. Therefore, the latter part of clause 5(iii) of the DoH indicates that RITL-Corporate Debtor, who is not the borrower of the appellants, agreed to discharge the liability of the third parties (RCom and RTL) to the appellants in the case of default of RCom or RTL. Therefore, the second part of clause 5(iii) of the DoH amounts to a guarantee provided by the Corporate Debtor to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have no relevance as we have to interpret clause 5(iii) of the DoH as it is. REQUIREMENT OF OCCURRENCE OF DEFAULT 61. There is an argument canvassed before us that default under the DoH has not occurred. We have already quoted the definition of financial debt under Section 5(8) of the IBC. There is no requirement incorporated therein that a debt becomes financial debt only when default occurs. Under Section 5(7) of the IBC, any person to whom financial debt is owed becomes a Financial Creditor even if there is no default in payment of debt. Therefore, this argument deserves to be rejected. 62. On this aspect, we may also note that under Section 3(12), default has been defined. This definition of default becomes relevant only while invoking the provisions of Section 7(1) of the IBC when the CIRP is sought to be initiated by the Financial Creditor. Section 7(1) provides that a Financial Creditor can initiate CIRP against the Corporate Debtor when there is a default on the part of the Corporate Debtor. There is no requirement under Section 5(8) of the IBC that there can be a debt only when there is a default. The moment it is established that the financial debt is owed to any person, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period; Section 14(1) imposes an embargo or prohibition on certain acts. However, it does extinguish the claim. If the argument that the claims of all the creditors of the Corporate Debtor are extinguished once the moratorium comes into force is accepted, no creditor would be able to file a claim. For example, if money advanced is secured by a promissory note or a negotiable instrument, a suit for recovery based on the said documents will not lie once a moratorium comes into force. But, the liability under the documents will continue to exist. In fact, after moratorium, no creditor can recover any dues from the Corporate Debtor. But still, there is a provision for making a claim. Hence, the argument based on moratori ..... X X X X Extracts X X X X X X X X Extracts X X X X
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