NCLAT (12.04.2023) In Mr. Zubin Bharucha Vs. Reliance AIF Management Company Ltd. [Company Appeal (AT) (Ins) No. 504 of 2021] held that;
in the Anuj Jain case (Supra) the Corporate Debtor has given property in mortgage and therefore, he is not considered a debtor liable to repay the debt claimed by the Financial Creditors.
In the case of Phoenix ARC Pvt. Ltd. (Supra) the Corporate Debtor has only extended the security in the form of pledge shares
in the present case the Corporate Debtor is a Guarantor and Co-Obliger for the Debentures held by the Debenture Holders and therefore, the liability of the Corporate Debtor in the present case is direct which is in accordance with the stipulations in the Deed of Irrevocable and Unconditional Guarantee and the Debenture Trust Deed.
the essential requirements for attracting Section 5(8) of the IBC has been laid down and it is laid down that there has to be a debt and also a disbursement of the Financial Debt to the Corporate Debtor.
Debenture Holders are considered Financial Creditors and therefore, the factum of Debenture Holders holding a Financial Debt within the meaning of Section 5(8) of the IBC is unquestionable.
Debenture holders and fixed deposit holders, unlike real estate holders, are involved in seeing that they recover the amounts that are lent and are thus not directly involved or interested in assessing the viability of the corporate debtors. Though not having the expertise or information to be in a position to evaluate feasibility and viability of resolution plans, such individuals, by virtue of being financial creditors,have a right to be on the Committee of Creditors to safeguard their interest.\
Thus, it was noticed that Section 127 of the Indian Contract Act provides that 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.
we accordingly confirm that “Financial Debt” will always carry an interest towards time value of money. However, interest per se in any business contract cannot be termed to make the “debt” as a “Financial Debt”, if it is in the nature of liquidated damages or in the nature of penal interest,
Excerpts of the order;
This Appeal has been filed under Section 61(1) of the Insolvency and Bankruptcy Code, 2016 (in short ‘IBC’) by the Appellant who is aggrieved by the order dated 06.05.2021 of the Adjudicating Authority (National Company Law Tribunal, Court No. V, Mumbai Bench) (in short ‘Impugned Order passed in C.P. (IB) No. 4108/MB/2019’). The Appellant is aggrieved by the Impugned Order whereby a Section 7 application filed by the Respondents No. 1 and 2 before NCLT, Mumbai was admitted and Corporate Insolvency Resolution Process (in short ‘CIRP’) was initiated.
2. In brief, the case of the Appellant is that the Corporate Debtor – Bharucha & Motivala Infrastructure Private Limited (in short ‘B & M Infra’) had given a Corporate Guarantee as a Co-Obliger in respect of the residential project called ‘The Cove’ which was being developed by Lake District Realty Private Limited (in short ‘LDRPL’ and also ‘Issuer Company’). It was developing the project with Pune Kondhwa Realty Private Limited (in short ‘PKRPL’) on land owned by PKRPL admeasuring a total of 6.7272 ha in village Yeolewadi, Taluka Haveli, District Pune through a Joint Development Agreement entered into between PKRPL with LDRPL on 27.06.2016.
3. The Appellant has further stated that PKRPL executed a Power of Attorney in favour of LDRPL in relation to the development of the project ‘The Cove’ and according to Joint Development Agreement, LDRPL was entitled to (a) 71.8% of the realization of unsold units (b) 87.1% of realization of allotted premises and (c) 57% of realization of row houses and villas constructed on the said property.
4. The Appellant has further stated that the Issuer Company LDRPL issued Non-Convertible Debentures (in short ‘NCDs’) to raise funds for the development of the said property and NCDs for Rs. 40,00,00,000/- were to be issued to the Debenture Holders on private placement basis which were subscribed by the R1 and R2 i.e. Reliance AIF Management Company Limited and Reliance Nippon Life Asset Management Limited (formerly known as Reliance Capital Asset Management Limited) respectively.
5. The Appellant has further added that Debenture Trust Deed dated 06.10.2016 was signed by the Debenture Holders with Vistra ITCL Pvt. Ltd. as the Debenture Trustee.
6. The Appellant has added that Series I Debentures were to be redeemed not later than 30.09.2020 and Series II Debentures were to be redeemed not later than 30.09.2021 and for security of repayments, upon insistence of Debenture Holders, a number of documents were executed which included a ‘Deed of Irrevocable and Unconditional Guarantee’ by the Issuer Company and PRA Realty Private Limited (which was providing project management services) in favour of the Debenture Trustee and all the security documents are referred as ‘Transaction Documents’.
11. We heard the arguments put forward by the learned counsels for the rival parties and also perused the record.
22. The issues that arise for consideration in this Appeal are as follows:-
(i) Whether the Debenture Holders, namely, the Respondents No. 1 and 2 are Financial Creditors in the light of the provisions of the IBC and the Debenture Trust Deed and Deed of Irrevocable and Unconditional Guarantee?
(ii) Whether the Debenture Holders can claim the repayment on account of Event of Default under Section 5(8) of the IBC and the Appellant is a Corporate Debtor under the provisions of the IBC?
23. At the outset we note the Rule 18(1)(c) of the Companies (Share Capital and Debentured) Rules, 2014, which is as follows: –
“18 (1) The company shall not issue secured debentures, unless it complies with the following conditions, namely:—
x x x
(c) the company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than sixty days after the allotment of the debentures, execute a debenture trust deed to protect the interest of the debenture holders; and”
24. From a perusal of the above stipulation it is clear that the appointment of a debenture trustee is a requirement of the relevant rules for protecting the interest of the debenture holders.
25. We first look at the issue of whether the Debenture Holders are the Financial Creditors as defined in the IBC. Section 5(8)(c) and Section 5(8)(i) of the IBC are as follows:-
“Section 5: Definitions.
5. In this Part, unless the context otherwise requires,—
(8) “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes—
(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
xx xx xx xx
(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;”
26. We further look at the definition of Financial Creditor in Section 5(7) of the IBC, which lays down that ‘Financial Creditor’ is a person to whom a ‘financial debt’ is owed and also includes a person to whom such debt has been legally assigned or transferred to.
27. Now coming to the issue whether the Debenture Holders can be considered ‘Financial Creditor’ as defined under the IBC. We note that the DTD is entered into between various parties viz. LDRPL (Issuer Company), Mr. Rustom Darius Bharucha, Mr. Zubin Darius Bharucha, Bharucha & Motivala Infrastructure Pvt. Ltd. and PRA Realty (India) Pvt. Ltd. and Vistra ITCL (India) Limited (The Debenture Trustee). Out of these parties, Bharucha & Motivala Infrastructure Pvt. Ltd. and PRA Realty (India) Pvt. Ltd. are the Guarantors and Co-Obligors of the issued NCDs as is laid down in the Debenture Trust Deed. The paragraphs 10, 11 and 12 of the Recital of the DTD are as follows:-
“10. With a view to raising debt for the purposes as more particularly described hereinafter, the Company being duly empowered by its memorandum of association and articles of association and pursuant to the authority granted by the resolution of the Board of Directors of the Company passed as its meeting held on 10th September, 2016 and authority granted by the resolution passed by the Shareholders in their meeting held on 15th September, 2016, (certified true copies of said resolutions are attached herein as Schedule AF) intends to issue, by way of a private placement, Debentures (as hereinafter defined) to the Debenture Holders in one or more tranches in the manner provided herein and in the Transaction Documents (as hereinafter defined).
11. Upon the request made by the Company and each of the other Security Providers to the Debenture Holders and relying upon the representations, warranties, covenants, securities, undertaking and indemnities provided by the Company and the other Security Providers under this Deed and the Transaction Documents, the Debenture Holders have decided to invest in the Company by subscribing to Series I Debenture and Series II Debentures each issued by the Company up to an aggregate amount of Rs. 40,00,00,000/- in the Company in a private placement basis (Transaction) in the manner and on the terms and conditions provided herein and other Transaction Documents. The subscription by the Debenture Holders is subject to the fulfilment of the Conditions Precedent as specified herein, to the satisfaction of the Majority Debenture Holders.
12. The NCDs shall be issued in dematerialised form and will be subject to the provisions of the Depositories Act, 1996 and rules notified by the Depository viz. NSDL (as defined hereinafter) from time to time.”
28. Further, Corporate Guarantee and Debenture Holders are defined in clause 1-Definitions of the DTD is as follows: –
“Corporate Guarantee means the irrevocable and unconditional guarantee to be executed by the Co-Obliger in favour of Debenture Trustee for the benefit of Debenture Holders as a security for the Debenture Outstandings in the form annexed hereto and marked as Schedule D.
Debenture Holder(s) means Reliance Capital Limited and/or, Reliance Nippon Life Asset Management Limited and/or Reliance Capital AIF Trustee Company Pvt. Ltd. and/or Reliance AIF Management Company Limited (Including any of their group companies, associates, affiliate, nominees or transferees) or the persons to whom the Company shall circulate the Offer Letter and which persons have agreed to subscribe to the Debentures and shall include their successors and assigns, nominees from time to time and shall also mean and include all such persons to whom the Debentures are, transferred from time to time and all persons whose names appear in the register of beneficial owners, where such Debentures are held in dematerialised form.”
29. Clause 3.1 of the DTD provides for issuance of NCDs to the Debenture Holders in accordance with the terms and conditions of the DTD. Further clause 3.4, which is about disbursement of the amount by Debenture Holders for subscription of NCDs, states as follows:-
“3.4 It is clarified that the Debenture Holders shall disburse the Debentures Subscription Amount, directly into the Debenture Payment Account in accordance with the provisions of this Deed”.
30. Clauses 8.6(b) & (d) which are relevant about principal payment of the redemption amount and ensuring a pre-tax IRR to the Debenture Holders by the Issuer Company are as follows:-
“8.6(b) Notwithstanding anything to the contrary stated herein, the Company shall, in addition to the principal amounts outstanding, be liable to pay a Redemption Premium to ensure that the Debenture Holders receive a pre-tax IRR of 21.67%,…
8.6(d) Upon redemption of the NCDs, if the Company does not pay the Redemption Amount to Debenture Holders, the Debenture Holders and the Debenture Trustee shall be entitled to exercise any of their rights as set out in the Transaction Documents and the Security shall be enforceable in the manner set out in the Transaction Documents.”
31. Further clause 8.12(a), which is regarding ‘Payments’, states as follows:-
“All payments shall be made to the Debenture Holders, whose name(s) are registered in the Register of Debenture Holders on the applicable record date.”
32. Further clause 17 of the DTD outlines the ‘Event of Default’ in clause 17.1.1 lays down as follows:-
“Any failure by the Company and/or any of the Security Providers to perform or comply with the terms, conditions, undertakings, obligations and covenants of the Transaction Documents.”
33. It is also clear from clause 17.1 that Debenture Trustee shall inform about the same to the Debenture Holders and declare an ‘Event of Default’ upon instructions of the majority Debenture Holders. Further, clause 18.1 lays down ‘The Consequences of an Event of Default’ whereby the Debenture Trustee shall if so directed by the majority Debenture Holders be entitled to exercise the right of calling upon the Company to pay to the Debenture Holders the accrued and unpaid interest or outstanding principal amount of NCDs. Clause 18.1(c) provides that the Debenture Trustee if directed by the Debenture Holders in writing shall be entitled to enforce all or any of the Security but there is no prejudice to the rights and remedies of the Debenture Holders under Applicable Law, which have also been defined in clause 1 definitions as any Indian Statute, Laws, Acts of the State Legislature or Indian Parliament among other laws and legal instruments.
34. It is clear from clause 3.4 that the Debenture Holders shall pay the amount of subscription for the NCDs and from clause 8.12(a) that all due payments shall be made to the Debenture Holders. Significantly, clause 8.6(d) stipulates that Debenture Holders and the Debenture Trustee shall be entitled to exercise any of their rights as set out in the Transaction Documents and the Security shall be enforceable in the manner set out in the Transaction Documents. Thus the rights as set out in Transaction Documents are separately available for enforcement to the Debenture Holders and Debenture Trustee. Clause 18.1(c) lays down that the rights given to the Debenture Trustee are available to the Debenture Holders for enforcing the Securities. Significantly, the Corporate Debtor is a Co-obligor too, and it undertakes all the obligations that are falling on the Issuer Company of the NCDs.
35. We now look at the “Deed of Irrevocable and Unconditional Guarantee” (in short “Deed of Guarantee”) entered into between B & M Infra and PRA Realty (India) Pvt. Ltd (both as “the Guarantors” who have ‘jointly and severally, absolutely, irrevocably and unconditionally agree and guarantee” the covenants of the Deed), Vistra ITCL (India) Limited (“Debenture Trustee”) and LDRPL (“the Company”) as a confirming party. In this Deed of Guarantee, B & M Infra and PRA Realty India Pvt. Ltd. are collectively referred to a Guarantors who have jointly and severally signed the Deed of Guarantee).
36. The recital of this Deed of Guarantee clearly states that upon a request made by the Issuer Company and the other Security Providers to the Debenture Holders, the Debenture Holders have decided to invest in the Issuer Company up to an amount of Rs. 40,00,00,000/- by subscribing to NCDs and the Guarantee is being issued by the Guarantors in follow up to the issue of NCDs. Recital 4 of this Deed of Guarantee is particularly noticed in this regard which is as follows:-
“4. In consideration of the Debenture Holders agreeing to subscribe to the NCDs in terms of the Debenture Trust Deed and the Transaction Documents, the Guarantors have agreed to issue and execute this Guarantee, the terms and conditions whereof are more particularly set out hereinafter, in favour of the Debenture Holders as security for the payment, repayment and reimbursement, as the case may be, of the Debenture Outstanding and the performance by the Company, the Mortgagor and the other Security Providers of their obligations under the Transaction Documents”.
37. Further, Recital 4 of the “Deed of Guarantee” notes as follows:
“4. In consideration of the Debenture Holders agreeing to subscribe to the NCDs in terms of the Debenture Trust Deed and the Transaction Documents, the Guarantors have agree to issue and execute this Guarantee, the terms and conditions whereof are more particularly set out hereinafter, in favour of the Debenture Trustee acting f0or, on behalf of and for the benefit of the Debenture Holders as security for the payment, repayment and reimbursement, as the case may be, of the Debenture Outstandings, and the performance by the Company, the Mortgagor and the other Security Providers of their obligations under the Transaction Documents.”
38. Further, Clause 2 of the ‘Deed of Guarantee’ which are as follows:-
“2. The Guarantors do and each of them both hereby hereby jointly and severally guarantee, as primary obligors and not merely as sureties, to the Debenture Trustee (acting for an on behalf of and for the benefit of the Debenture Holders), the payment, repayment and reimbursement (as the case may be), of the Debenture Outstanding and the performance by the Company, the Mortgagor and the other Security Providers of their obligations under the Transaction Documents and all other sums payable by the Security Providers to the Debenture Holders (the Obligations) and hereby guarantee, assure and undertake, as continuing security for the due performance and compliance of the Obligations, that in the event of failure on the part of the Company, the Mortgagor and the other Security Providers in complying with the Obligations, the Guarantors shall comply with such Obligations, including in the case of any payment to any of the Debenture Trustee and/or the Debenture Holders which had fallen due is not paid, whether at scheduled maturity or on acceleration or otherwise, then the Guarantors shall unconditionally and irrevocably pay, on demand from time to time by the Debenture Trustee, and no later than two days of receipt of such demand, the amounts equivalent to the amounts fallen due for appropriation towards the Debenture Outstandings and all other sums payable by the Security Providers to the Debenture Trustee and/or the Debenture Holders (as the case may be) under the Debenture Trust Deed and/or any other Transaction Documents.
39. Further, Clause 4 of the “Deed of Guarantee” very clearly places the obligation on the Guarantors for the payment of the amount mentioned in the Demand Certificate, which is as follows:-
“4. The Guarantors agree and undertake that they shall without any demur, delay or protest and on first demand and no later than two days of receipt of a demand certificate in writing in the format annexed as Schedule I (Demand Certificate) from the Debenture Trustee demanding payment of the amount mentioned therein, make payment of such amount to the Debenture Holders, towards the Obligations, as per the demand certificate.”
40. Thus a reading of the recitals 2, 3 & 4 and clauses 2 and 4 of the ‘Deed of Irrevocable and Unconditional Guarantee’ makes it clear that the Guarantors have jointly and severally undertaken without any demur, delay or protest and on first demand and no later than two days of the receipt of a demand certificate in writing from the Debenture Trustee demanding payment of the amount mentioned therein make payment of such amount to the Debenture Holders.
41. A conjoint reading of the above-mentioned recitals and clauses of the “Debenture Trust Deed” and the “Deed of Irrevocable and Unconditional Guarantee” makes it clear that the Debenture Holders, who have subscribed to the NCDs for the benefit of the Issuer Company, have the right to receive payments after the issue of Demand Certificate by the Debenture Trustee and the Guarantors have jointly and severally undertaken to make such payment/reimbursement to the Debenture Holder on the issue of the Demand Certificate by the Debenture Trustee.
42. The Learned Counsel for the Respondents has relied upon a decision of Hon’ble Calcutta High Court in the matter of ‘Calcutta Safe Deposit Co., Ltd. Vs. Ranjit Mathuradas Sampat, 1970 SCC Online Cal 59’ which holds that debenture holders are ‘creditors’ who have the right to present a petition for winding up of the company, which is akin to a petition for insolvency resolution:-
“23. In any event, a special right has been given to the debenture holders and they would be deemed to be the creditors within the meaning of Clause (b) of Sub-section (1) of Section 439 of the Companies Act, 1956. This new definition of the word ‘creditors’ has been introduced by the 1956 Act and accordingly the debenture holders’ right to present a petition for winding up has been recognised by the statute.”
43. The Learned Counsel for the Appellant has cited the judgment of Hon’ble Supreme Court in the matters of Anuj Jain (Supra) and Phoenix ARC Pvt. Ltd. Vs. Ketulbhai Ramubhai Patel, (2021) 8 SCC 32‘ to claim that a party that provides a mortgage or pledges shares as security is not a Corporate Debtor and therefore, is not liable to repay the Financial Debt claimed by the Financial Creditors. The relevant observations in the two judgments are as follows:-
Extract from Anuj Jain (Supra)
“50. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons (supra), leaves nothing to doubt that in the scheme of the IBC, what is intended by the expression ‘financial creditor’ is a person who has direct engagement in the functioning of the corporate debtor; who is involved right from the beginning while assessing the viability of the corporate debtor; who would engage in restructuring of the loan as well as in reorganisation of the corporate debtor’s business when there is financial stress. In other words, the financial creditor, by its own direct involvement in a functional existence of corporate debtor, acquires unique position, who could be entrusted with the task of ensuring the sustenance and growth of the corporate debtor, akin to that of a guardian. In the context of insolvency resolution process, this class of stakeholders namely, financial creditors, is entrusted by the legislature with such a role that it would look forward to ensure that the corporate debtor is rejuvenated and gets back to its wheels with reasonable capacity of repaying its debts and to attend on its other obligations. Protection of the rights of all other stakeholders, including other creditors, would obviously be concomitant of such resurgence of the corporate debtor.
51. Indisputably, the debts in question are in the form of third party security; said to have been given by the corporate debtor JIL so as to secure the loans/advances/facilities obtained by JAL from the respondent-lenders. Such a ‘debt’ is not and cannot be a ‘financial debt’ within the meaning of Section 5(8) of the Code; and hence, the respondent-lenders, the mortgagees, are not the ‘financial creditors’ of the corporate debtor JIL.”
Extract from Phoenix ARC Pvt. Ltd. (Supra)
“36. 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).”
44. Both the above judgments are distinguishable on the ground that in the Anuj Jain case (Supra) the Corporate Debtor has given property in mortgage and therefore, he is not considered a debtor liable to repay the debt claimed by the Financial Creditors. In the case of Phoenix ARC Pvt. Ltd. (Supra) the Corporate Debtor has only extended the security in the form of pledge shares and whereas in the present case the Corporate Debtor is a Guarantor and Co-Obliger for the Debentures held by the Debenture Holders and therefore, the liability of the Corporate Debtor in the present case is direct which is in accordance with the stipulations in the Deed of Irrevocable and Unconditional Guarantee and the Debenture Trust Deed.
45. The Learned Counsel for the Appellant has also cited the judgment of Hon’ble Supreme Court in the matter of ‘New Okhla Industrial Development Authority v. Anand Sonbhadra, (2023) 1 SCC 724’ wherein the essential requirements for attracting Section 5(8) of the IBC has been laid down and it is laid down that there has to be a debt and also a disbursement of the Financial Debt to the Corporate Debtor. As has been held by the Hon’ble Supreme Court in the matter of Pioneer Urban Land and Infrastructure Limited & Anr. (Supra) Debenture Holders are considered Financial Creditors and therefore, the factum of Debenture Holders holding a Financial Debt within the meaning of Section 5(8) of the IBC is unquestionable.
46. The Learned Counsel for the Respondent has also referred to judgment of NCLT, Mumbai in ‘Bennett Property Holdings Company Ltd. vs. Brick Eagle Affordable Housing (CP (IB) 1267/I&B/2019)’ to claim that debt subscription agreement is as would as a loan agreement as has been held in para 24 of this judgment. As has been noted above in various judgments cited earlier in this judgment, the Debenture Holders are Financial Creditors within the meaning of Section 5(8) of the IBC and the Corporate Debtor who has Co-obligor and Guarantor of the loan holds responsibility and obligations to repay the debts as is laid down in clause …….of the Deed of Irrevocable and Unconditional Guarantee and therefore, the jural relationship between the Debenture Holders as the Financial Creditor and
the Corporate Debtor as Guarantor cum Co-obligor is clearly established.
47. On the other hand, the Learned Counsel for the Respondent has cited the judgment in the matter of ‘M/S Orator Marketing Pvt. Ltd. vs M/S Samtex Desinz Pvt. Ltd., (2021) SCC OnLine SC 513’ in which the relevant portion is as follows:
“14. In Pioneer Urban Land and Infrastructure Ltd. Vs. Union of India4, this Court speaking through Nariman, J. referred to several earlier judgments including Innoventive Industries Ltd. (supra) and Swiss Ribbons Pvt. Ltd. (supra) and held that even individuals who were debenture holders and fixed deposit holders could also be financial creditors who could initiate the Corporate Resolution Process.
15. The definition of ‘financial debt’ in Section 5(8) of the IBC cannot be read in isolation, without considering some other relevant definitions, particularly, the definition of ‘claim’ in Section 3(6), ‘corporate debtor’ in Section 3(8), ‘creditor’ in Section 3(10), ‘debt’ in section 3(11), ‘default’ in Section 3(12), ‘financial creditor’ in Section 5(7) as also the provisions, inter alia, of Sections 6 and 7 of the IBC.
18. The eligibility of a person, to initiate the Corporate Insolvency Resolution Process, if questioned, has to be adjudicated upon consideration of the key words and expressions in the aforesaid Section and other related provisions.”
48. The Learned Counsel for the Respondent has also cited the judgment of Hon’ble Supreme Court in ‘Pioneer Urban Land and Infrastructure Limited & Anr. (Supra) which is as follows :-
“41. Shri Shyam Divan relying upon Nagpur Improvement Trust and Anr. v. Vithal Rao and Ors. (1973) 1 SCC 500 at paragraph 26 and Subramanian Swamy v. Director, Central Bureau of Investigation and Anr. (2014) 8 SCC 682 at paragraphs 44, 58 and 68 argued that the object of the amendment is itself discriminatory in that it seeks to insert into a “means and includes” definition a category which does not fit therein, namely, real estate developers who do not, in the classical sense, borrow monies like banks and financial institutions. According to him, therefore, the object itself being discriminatory, the inclusion of real estate developers as financial debtors should be struck down. We have already pointed out how real estate developers are, in substance, persons who avail finance from allottees who then fund the real estate development project. The object of dividing debts into two categories under the Code, namely, financial and operational debts, is broadly to sub-divide debts into those in which money is lent and those where debts are incurred on account of goods being sold or services being rendered. We have no doubt that real estate developers fall squarely within the object of the Code as originally enacted insofar as they are financial debtors and not operational debtors, as has been pointed out hereinabove. So far as unequals being treated as equals is concerned, home buyers/allottees can be assimilated with other individual financial creditors like debenture holders and fixed deposit holders, who have advanced certain amounts to the corporate debtor. For example, fixed deposit holders, though financial creditors, would be like real estate allottees in that they are unsecured creditors. Financial contracts in the case of these individuals need not involve large sums of money. Debenture holders and fixed deposit holders, unlike real estate holders, are involved in seeing that they recover the amounts that are lent and are thus not directly involved or interested in assessing the viability of the corporate debtors. Though not having the expertise or information to be in a position to evaluate feasibility and viability of resolution plans, such individuals, by virtue of being financial creditors, have a right to be on the Committee of Creditors to safeguard their interest. Also, the question that is to be asked when a debenture holder or fixed deposit holder prefers a Section 7 application under the Code will be asked in the case of allottees of real estate developers – is a debt due in fact or in law? Thus, allottees, being individual financial creditors like debenture holders and fixed deposit holders and classified as such, show that they within the larger class of financial creditors, there being no infraction of Article 14 on this score.”
49. Both the above judgments consider the Debenture Holders as Financial Creditors, in the facts that are quite similar to the facts of the present case wherein the Debenture Holders (Respondents No. 1 and 2) are the Financial Creditors who are owed debt by the Corporate Debtor in accordance with the “Deed of Irrevocable and Unconditional Guarantee” and the “Debenture Trust Deed” whereby the Corporate Debtor as Co-Obligor has guaranteed repayment of due amounts to the Debenture Holders.
50. We also consider the argument of the Learned Counsel for the Appellant who has claimed, while citing the judgment of Hon’ble Supreme Court in the matter of ‘Vidarbha Industries Power Limited v. Axis Bank Limited, (2022) 8 SCC 352’, that it is not obligatory on the part of the Adjudicating Authority to pass orders for initiation of CIRP on mere existence of a debt and default. The cited portion of the judgment is as follows :-
“77. On the other hand, in the case of an application by a Financial Creditor who might even initiate proceedings in a representative capacity on behalf of all financial creditors, the Adjudicating Authority might examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor. The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor.”
51. We note the above judgment and are of the opinion that it is distinguishable on the basis of the fact that the observation of Hon’ble Supreme Court is that the Adjudicating Authority may in its discretion not admit the application but it would depend on all the relevant facts and circumstances of the case and the overall financial health and viability of the Corporate Debtor. In the facts of the case as argued by both the parties, it is evident that the project has suffered for variety of reasons and its progress is hindered, yet the financial creditors cannot be put to disadvantage on this ground, and initiation of CIRP becomes necessary to for repayment of the financial debt owed to the financial creditors. Therefore, the discretion has to be exercised in favour of the financial creditors who, in the present case, are the Debenture Holders.
52. The Learned Counsel for the Respondent has also placed reliance on a decision of this Tribunal in the case of ‘Ascot Realty Pvt. Ltd. Vs. Ajay Kumar Agarwal & Ors., 2020 SCC Online NCLAT 732’ which is as follows, to claim that guarantors are not liable to repay financial debt:-
“19. We proceed to refer to the Judgement of Hon’ble Supreme Court of India in the matter of “Anuj Jain” on which both the parties are relying on the basis of their arguments.
20. In the matter of Anuj Jain, the Corporate Debtor – JIL had mortgaged properties as collateral securities towards the loans and advances which had been made by the lender banks and financial institutions to holding Company JAL. Para – 2.2 of the Judgement (we are referring to Judgement as reported in Manupatra) reads as under:-
“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, Company Appeal (AT) (Ins) No.658 of 2020 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 of the debt of its holding company JAL.”
Hon’ble Supreme Court in Para – 12.4 noted:-
“12.4. The provisions contained in Sections 124, 126 and 127 of the Indian Contract Act, 1872 shall also have bearing on the issues at hand and hence, the same may also be noted as follows:-
“124. “Contract of indemnity” defined.- 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, is called a “contract of indemnity.”
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.
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.”
Thus, it was noticed that Section 127 of the Indian Contract Act provides that 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.”
53. The Learned Counsel for the Respondents has relied upon the following decision of this Tribunal in the matter of ‘Budhpur Buildcon Pvt. Ltd. Vs Abhay Narayan Manudhane, CA (AT) (Ins) No. 589 of 2021’ in support of his argument that the subscription towards debentures carry a ‘time value for money’ and therefore such amounts are ‘financial debts’. We find strength in his argument. The relevant portion of the cited judgment is as follows:
“m. All the above citations reflect one thing categorically Creditor to the Debtor purely in the form of release of fund as a “borrowing” and must have a “time value of money”. The method may be different but the nature must be borrowing and in extended terminology even the liability in respect of guarantee is also covered. There must be a “Financial Debt” which is owed by the other side i.e. the Debtor. It should be amply clear that the CD owe the “Financial Debt” to the Creditor. There is a difference between the levy of liquidated damages or penal interest for default and the financial debt per se. Hence, we cannot borrow unrelated concept from unrelated judgments to prove that wherever a word “interest” is there it means corresponding to a “Financial Debt” and we accordingly confirm that “Financial Debt” will always carry an interest towards time value of money. However, interest per se in any business contract cannot be termed to make the “debt” as a “Financial Debt”, if it is in the nature of liquidated damages or in the nature of penal interest, which is a result of compensation for breach of contract which is stipulated for penalty. Hence, while examining the case, whether the Appellant is a Financial Creditor or not we are now arriving at a conclusion based on above said discussions both on law & on facts and the citations produced by the parties, some of which have been explicitly cited as above reveals that the Appellant is not a “Financial Creditor” and hence, we are upholding the order of the Adjudicating Authority”
54. The Learned Counsel for the Respondent has also cited a judgment of the Hon’ble Supreme Court in the matter of ‘E.S. Krishnamurthy & Ors. Vs. Bharath Hi-Tech Builders Pvt. Ltd., (2022) 3 SCC 161’ which is as follows:-
“31 On a bare reading of the provision, it is clear that both, Clauses (a) and (b) of sub-Section (5) of Section 7, use the expression “it may, by order” while referring to the power of the Adjudicating Authority. In Clause (a) of sub-Section (5), the Adjudicating Authority may, by order, admit the application or in Clause (b) it may, by order, reject such an application. Thus, two courses of action are available to the Adjudicating Authority in a petition under Section 7. The Adjudicating Authority must either admit the application under Clause (a) of sub-Section (5) or it must reject the application under Clause (b) of sub-Section (5). The statute does not provide for the Adjudicating Authority to undertake any other action, but for the two choices available.
32 In Innoventive Industries (supra), a two-judge Bench of this Court has explained the ambit of Section 7 of the IBC, and held that the Adjudicating Authority only has to determine whether a “default” has occurred, i.e., whether the “debt” (which may still be disputed) was due and remained unpaid. If the Adjudicating Authority is of the opinion that a “default” has occurred, it has to admit the application unless it is incomplete. Speaking through Justice Rohinton F Nariman, the Court has observed:
30. On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise.” (emphasis supplied)
55. We note that the above judgment very cogently explains the conditions under which a section 7 application has to be considered by the Adjudicating Authority. We are of the clear opinion that in the present case the Adjudicating Authority has looked at the relevant aspects of ‘financial debt’ and ‘default’ before passing the relevant order for admission of the section 7 application filed by the respondents.
56. In the light of the recitals and various clauses of the “Deed of Irrevocable and Unconditional Guarantee” and the “Debenture Trust Deed” and the facts of this case, we find that an ‘Event of Default’ notice was first sent by the Debenture Holders on 02.01.2019 and another ‘Event of Default’ notice was sent on 21.02.2019 where after the ‘Demand Certificate’ dated 14.05.2019 was issued by the Debenture Trustee to B & M Infra which was the Respondent No. 3 in the Section 7 petition invoking the Guarantee dated 06.10.2016 and calling upon B & M Infra to pay to the Debenture Holders an amount of Rs. 37,51,64,939/-. It is thus clear that in accordance with clause 4 of the Deed of Guarantee the Guarantors have to pay to the Debenture Holders the amount stated in the Demand Certificate once an Event of Default has been declared under the Debenture Trust Deed. Therefore, in accordance with clause (i) of Section 5(8), B & M Infra is liable to pay the amount claimed as Financial Debt on account of the “Deed of Guarantee” given by it both as a Guarantor and Co-obligor. Therefore, we come to the inescapable conclusion that B & M Infra (R-3) is the Corporate Debtor with regard to the Section 7 application filed by the R-1 and R-2 as Financial Creditors.
57. We therefore answer the first issue as follows: the Debenture Holders, namely, Respondents No. 1 and 2 are the Financial Creditors of the Corporate Debtor – B & M Infra in the light of the provisions of the IBC.
58. Further, the issue whether the Debenture Holders can claim repayment with regard to the amount mentioned in the demand certificate as a Financial Debt is squarely answered in Clause 4 of the Deed of Irrevocable and Unconditional Guarantee of which B & M Infra and Vistra ITCL are co-signees since the demand certificate has been issued by the Debenture Trustee on 14.05.2019, a conjoint reading of the Debenture Trust Deed and Deed of Guarantee clearly establishes that the amount claimed in demand certificate is to be paid directly to the Debenture Holders by Respondent No. 3, who is the Corporate Debtor within the provisions of the IBC.
59. On the basis of aforementioned detailed discussion, we are of the clear view that the Adjudicating Authority has not committed any error in admitting the section 7 application filed by the respondents. We, therefore, find no reason to interfere with the Impugned Order.
60. The appeal being devoid of merit is dismissed with no order regarding cost.
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