SCI (03.02.2021) in Phoenix ARC Pvt. Ltd. Vs. Ketulbhai Ramubhai Patel (Civil Appeal No.5146 of 2019) held that;
The Appellate Tribunal held that pledge of shares in question do not amount to “disbursement of any amount against the consideration for the time value of money” and it do not fall within sub-clause (f) of sub-section (8) of Section 5 as suggested by the learned counsel for the appellant.
that a person having only security interest over the assets of corporate debtor, even if falling within the description of 'secured creditor' by virtue of collateral security extended by the corporate debtor, would not be covered by the financial creditors as per definitions contained in sub-section (7) and (8) of Section 5.
Excerpts of the order;
This appeal under Section 62 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Code”) has been filed questioning the judgment of the National Company Law Appellate Tribunal, New Delhi dated 09.04.2019 dismissing the Company Appeal filed by the appellant. The Company Appeal was filed by the appellant against order dated 22.02.2019 of National Company Law Tribunal, Mumbai Bench rejecting the Miscellaneous Application filed by the appellant under Section 60(5)(c) of the Code holding that the appellant is not the financial creditor of the corporate debtor, Doshion Veolia Water Solutions Private Limited.
# 2. Brief facts of this case for deciding this appeal are:
L & T Infrastructure Finance Company Limited advanced the financial facility to Doshion Limited, a Company incorporated and registered under the Companies Act, 1956. A Facility Agreement dated 12.05.2011 was executed between the Doshion Limited (borrower) and L & T Infrastructure Finance Company Limited (lender) advancing to the borrower a financial facility of Rs.40 crores repayable in 72 structured monthly instalments. Schedule IV of the facility agreement dealt with “Security Creation”. The Board of Directors of Doshion Veolia Water Solutions Private Limited (corporate debtor) passed a Resolution on 26.07.2011 to give Non-Disposal Undertaking in favour of L & T Infrastructure Finance Company Limited whereby Board was authorised to provide an undertaking to the effect that 100% of their shareholding in Gondwana Engineers Limited (GEL) shall not be disposed of so long as any amounts were due and payable and outstanding under the financial assistance proposed to be provided by L&T Infra to borrower. On 10.01.2012 a Pledge Agreement was executed between Doshion Veolia Water Solutions Private Limited and L&T Infrastructure Finance Company Limited by which agreement 40,160 shares of Gondwana Engineers Limited were pledged as a security. On 10.01.2012 a deed of undertaking was also executed by Doshion Veolia Water Solutions Private Limited in favour of L&T Infrastructure Finance Co.Ltd. By agreement dated 30.12.2013 L&T Infrastructure assigned all rights, title and interest in the financial facility including any security, interest therein in favour of Phoenix ARC Pvt. Ltd., the appellant under Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The borrower, Doshion Limited failed to repay as per agreed terms dated 12.05.2011. The appellant issued a notice dated 19.02.2014 and recalled the financial facility. The appellant filed O.A.No.325 of 2016 before the Debts Recovery Tribunal, Ahmedabad which is said to be pending.
# 3. On 31.08.2018, Bank of Baroda filed Company Petition No.CP(IB)1752/MB/2017 before the Adjudicating Authority under Section 7 of the Code to initiate the corporate insolvency resolution process in respect of the Doshion Veolia Water Solutions Private Limited (Corporate Debtor). By order dated 31.08.2018, the Adjudicating Authority admitted the Company Petition and the corporate insolvency resolution process began. The respondent was appointed as the Interim Resolution Professional of the corporate debtor which was later confirmed as the Resolution Professional of the corporate debtor. Pursuant to the commencement of corporate insolvency resolution process in respect of the corporate debtor, the appellant filed its claim for an amount of Rs.83,49,85,667/- with the respondent. The respondent vide email dated 20.09.2018 expressed an opinion that as per the Pledge Agreement submitted by the appellant, the corporate debtor’s liability was restricted to pledge of the shares only. The respondent sought further documents in respect of the appellant’s claim. Although additional documents were submitted by the appellant, the respondent by email dated 23.11.2018 reiterated the earlier view.
# 4. The appellant filed M.A.No.1514 of 2018 before the National Company Law Tribunal, Bench at Mumbai in Company Petition No.CP(IB)1752/MB/2017 seeking a direction to the respondent to admit the claim of the appellant as a financial debt with all consequential benefits including voting rights in the Committee of creditors of the corporate debtor. The appellant stated that pledge of the shares by the corporate debtor was in essence a guarantee for financial debt and, therefore, appellant was a financial creditor of the corporate debtor. The Resolution Professional vide email dated 04.12.2018 rejected the claim of the appellant as financial creditor of the corporate debtor on the ground that there was no separate Deed of Guarantee in favour of the Assignor. The respondent filed an affidavit in reply before the Adjudicating Authority. After hearing the parties, the Adjudicating Authority passed an order dated 22.02.2019 rejecting the Miscellaneous Application filed by the appellant. The Adjudicating Authority held that the applicant’s status as financial creditor of the corporate debtor is not proved in the light of Section 5(8) of the Code.
# 5. Aggrieved by the judgment of the Adjudicating Authority, the appeal was filed by the appellant before the Appellate Tribunal. The Appellate Tribunal held that pledge of shares in question do not amount to “disbursement of any amount against the consideration for the time value of money” and it do not fall within sub-clause (f) of sub-section (8) of Section 5 as suggested by the learned counsel for the appellant. The Appellate Authority finding no merit in the appeal, dismissed the appeal. Aggrieved by the judgment of the Appellate Tribunal, the appellant has filed the present appeal.
# 6. We have heard Shri K.V. Vishwanathan, learned senior counsel for the appellant, Ms. Ami Jain, learned counsel for the respondent. We have also heard learned counsel for the Bank of Baroda as intervenor.
# 21. Whether the corporate debtor owed any financial debt to the appellant so as to treat the appellant as financial creditor is the question to be answered. The definition of ‘financial debt’ as contained in Section 5(8) contains the expressions “means” and “includes”. The definition begins with the words “financial debt” means 'a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes'... The main part of the definition, thus, provides that financial debt means a debt “which is disbursed against the consideration for the time value of money”. The definition in the second part gives instances which also includes financial debt. Learned counsel for the appellant in his submission has relied on Section 5(8)(i) to support his claim that the appellant is the financial creditor. Learned counsel for the appellant has referred both sub-clause (b) and sub clause (i) and submits that credit facility which was extended to the borrower is referable to Section 5(8) (b) and the corporate debtor pledged his share to give indemnity for credit facility and which is in a sense of guarantee. The debt is a financial debt within the meaning of Section 5(8)(i) and the appellant is the financial creditor. There can be no dispute that credit facility given by the Assignor to borrower by Facility Agreement dated 12.05.2011 is a credit facility which can be covered under Section 5(8)(b). A bare perusal of Section 5(8)(i) indicates that it contemplates 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 clause (8). Sub-clause (i) uses two expressions “guarantee” and “indemnity” for any of the items referred to in sub-clauses (a) to (h).
# 22. Chapter VIII of the Indian Contract Act, 1872 deals with “Of Indemnity and Guarantee”. Section 124 defines “Contract of indemnity” and Section 126 defines “Contract of guarantee”. Section 126 which is relevant for the present case is as follows
“ Section 126. “Contract of guarantee”, “surety”, “principal debtor” and “creditor”.- A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.”
23. As clear from the definition a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The present is not a case where the corporate debtor has entered into a contract to perform the promise, or discharge the liability of the borrower in case of his default. The Pledge Agreement is limited to pledge 40,160 shares as security. The corporate debtor has never promised to discharge the liability of the borrower. The Facility Agreement under which the borrower was bound by the terms and conditions and containing his obligation to repay the loan security for performance are all contained in the Facility Agreement. A contract of guarantee contains a guarantee “to perform the promise or discharge the liability of third person in case of his default”. Thus, key words in Section 126 are contract “to perform the promise”, or “discharge the liability”, of a third person. Both the expressions “perform the promise” or “discharge the liability” relate to “a third person”. The Pledge Agreement dated 10.01.2012 does not contain any contract that the promise which was made by the borrower in the Facility Agreement dated 12.05.2011 to discharge the liability of debt of Rs.40 crores is undertaken by the corporate debtor. It was the borrower who had promised to repay the loan of Rs.40 crores in Facility Agreement dated 12.05.2011 and it was the borrower who had undertaken to discharge the liability towards the lender. The Pledge Agreement dated 10.01.2012 does not contain any contract that corporate debtor has contracted to perform the promise, or discharge the liability of the third person. The Pledge Agreement is limited to pledge of 40,160 shares of GEL only. We have noticed above that in the Facility Agreement there is a Security Creation by way of Schedule IV in which 100% equity shares of GEL were pledged by the borrower and second pari-passu charge on all current assets of the GEL was also created as security for loan. It transpires that since some shares of GEL were also with the corporate debtor who is subsidiary Company of Doshion Ltd. the same was also pledged with the lender as additional security by a subsequent agreement dated 10.01.2012.
# 24. The Pledge Agreement and undertaking given, entered between Assignor and corporate debtor cannot be termed as contract of guarantee within the meaning of Section 126.
# 25. The expression “pledge” is separately dealt with in the Indian Contact Act, 1872. Section 172 defines 'pledge' in the following words:
“Section 172. "Pledge", "pawnor", and "pawnee" defined.-The bailment of goods as security for payment of a debt or performance of a promise is called "pledge". The bailor is in this case called the "pawnor". The bailee is called "pawnee".:”
# 26. The word 'guarantee' and 'indemnity' as occurring in Section 5(8)(i) has not been defined in the Code. Section 3 sub-section (37) of the Code provides that words and expressions used but not defined in the Code but defined in the Indian Contract Act, 1872 shall have the meanings respectively assigned to them.
# 29. The learned counsel for the respondent has placed heavy reliance on two-Judge Bench judgment of this Court in Jaypee Infratech Limited vs. Axis Bank Limited (supra). One of the issues which came before this Court was as to whether the respondent (lenders of JAL) could be financial creditors of the corporate debtor JIL on the strength of the mortgages created by the corporate debtor as collateral securities of its holding Co. JIL. In the above case, the AXIS Bank had lent finance to Jaiprakash Associates Ltd.(JAL), the holding company, Jaypee Infratech Ltd.(JIL) had mortgaged several properties as collateral securities for the loans and advances made by the Axis Bank to JAL. Interim Resolution Professional has rejected the claim of the Asix Bank to be recognised as financial creditor of corporate debtor (JIL). The National Company Law Tribunal has approved the decision of Interm Resolution Professional rejecting the claim of Axis Bank as financial creditor against which appeal was filed before the Appellate Tribunal which was allowed. The corporate debtor had filed an appeal before this Court in which appeal one of the issues was as to whether the Axis Bank can be recognised as financial creditor of the corporate debtor on the strength of the mortgaged by the JIL, corporate debtor of its holding Co. JAL. This Court after noticing the facts, noted rival submissions of the parties on the above issue in detail. The two earlier judgments of this Court, namely, Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 and Pioneer Urban Land & Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 were extensively noted. . . . . . . . . .
# 30. This Court held that a person having only security interest over the assets of corporate debtor, even if falling within the description of 'secured creditor' by virtue of collateral security extended by the corporate debtor, would not be covered by the financial creditors as per definitions contained in sub-section (7) and (8) of Section 5. What has been held by this Court as noted above is fully attracted in the present case where corporate debtor has only extended a security by pledging 40,160 shares of GEL. The appellant at best will be secured debtor qua above security but shall not be a financial creditor within the meaning of Section 5 sub-sections (7) and (8).
# 31. Mr. Vishwanathan tried to distinguish the judgment of this Court in Jaypee Infratech Limited (supra) by contending that the above judgment has been rendered in the specific facts scenario which does not apply to the present case at all. Shri Vishwanathan submits that in Jaypee Infratech Limited case (supra) corporate debtor had created mortgage for the loan obtained by the parent Company and no benefit of such loan has been received by the corporate debtor whereas in the present case corporate debtor has been the direct and real beneficiary of the loan advanced by Assigner to the parent Company of the corporate debtor. The above point as contended by the learned counsel does not commend us. The present is also a case where only security was created by the corporate debtor in 40,160 shares of GEL, there was no liability to repay the loan taken by the borrower on the corporate debtor in the present case. At best the Pledge Agreement and Agreement of undertaking executed on 10.01.2012, that is, subsequent to Facility Agreement, is security in favour of Lender-Assignor who at best will be secured creditor qua corporate debtor and not the financial creditor qua corporate debtor.
# 32. We may notice that the Appellate Tribunal has dealt with Section 5(8)(f) while rejecting the claim of the appellant as to be the financial creditor. It appears that the submission based on Section 5(8) (i) was not addressed before the Appellate Tribunal which has now been pressed before us. We, thus, uphold the decision of the Resolution Professional as approved by the NCLAT as correct. The appellant is not financial creditor of the corporate debtor. Hence, Miscellaneous Application was rightly rejected by the Adjudicating Authority. We, however, make it clear that observations made by us in this judgment are only for deciding the claim of the appellant as the financial creditor within the meaning of Section 5(7) and 5(8) of the Code and shall have no bearing on any other proceedings undertaken by the appellant to establish any of its right in accordance with law. We, thus, do not find any merit in this appeal. The appeal is dismissed. No costs.
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