Phoenix Arc Pvt. Ltd. vs Ketulbhai Ramubhai Patel on 3 February, 2021


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Supreme Court of India

Phoenix Arc Pvt. Ltd. vs Ketulbhai Ramubhai Patel on 3 February, 2021

Author: Ashok Bhushan

Bench: Ashok Bhushan, R. Subhash Reddy

                                                                                1

                                                                     REPORTABLE

                                IN THE SUPREME COURT OF INDIA
                                 CIVIL APPELLATE JURISDICTION

                                CIVIL APPEAL NO.5146 of 2019

         PHOENIX ARC PVT. LTD.                                ...APPELLANT(S)

                                                VERSUS

         KETULBHAI RAMUBHAI PATEL                             ...RESPONDENT(S)



                                          J U D G M E N T

ASHOK BHUSHAN,J.

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
Signature Not Verified

Digitally signed by
MEENAKSHI KOHLI
Date: 2021.02.03

under Section 60(5)(c) of the Code holding that the
16:58:53 IST
Reason:

appellant is not the financial creditor of the
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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
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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
4

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
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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
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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
7

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.

7. Shri K.V. Vishwanathan, learned senior counsel,

submits that the appellant is a financial creditor

within the meaning of Section 5 sub-section (8)(i) of

the Code. He submits that liability of the corporate

debtor, who is surety, is co-extensive to that of

debtor and the creditor has full rights to pursue his

liability against the surety even before the

creditor. There is a debt which is payable by the

corporate debtor to the appellant and for securing

that debt, the corporate debtor has created a

security interest in favour of the Assignor that is

L&T Infrastructure Ltd. The L&T Infrastructure Ltd.
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having assigned all its rights and obligations to the

appellant vide Assignment dated 30.12.2013, the

appellant has stepped into the shoes of L&T

Infrastructure Ltd. The parent Company of corporate

debtor Doshion Ltd. took a credit facility from the

predecessor of the appellant and the corporate debtor

undertook a liability by creating a security interest

in the form of shares of Gondwana Engineers Limited.

The present case is covered by Section 5(8)(b) read

with 5(i), not accepting the appellant as financial

creditor would have effect of leaving the appellant

effectively remediless inasmuch as the appellant

cannot enforce the guarantee during the subsistence

of moratorium period and once the resolution plan is

passed without any redress to the appellant in the

Financial Plan, the said resolution plan would be

binding upon the appellant whereupon the appellant

shall be gravely prejudiced since nothing could then

be recoverable from the corporate debtor. The

corporate debtor in effect has provided a guarantee

to L&T Infrastructure Ltd. whereby the corporate
9

debtor guarantees L&T Infrastructure the debts due

from Doshion Ltd. and in case of non-payment, a

charge subsisted upon the 100% shareholding of

Gondwana Engineers Ltd. As the corporate debtor has

secured the payment of the loan, the liability of

corporate debtor to L&T Infrastructure became co-

extensive to that of Doshion Ltd. under Section 128

of the Indian Contract Act, 1872 which, inter alia,

financial creditor to the appellant herein and the

loan was advanced for interest and the said loan was

secured by the corporate debtor.

8. Learned counsel further submits that the judgment

of this Court in Anuj Jain, Interim Resolution

Professional for Jaypee Infratech Limited vs. Axis

Bank Limited and others, (2020) 8 SCC 401, relied by

the learned counsel for the respondent is

distinguishable from the facts of the present case.

He submits that any security that would permit the

right of action against the third party that is not

the borrower, would amount to guarantee. The mere
10

fact that corporate debtor has not borrowed money

from the appellant, it cannot absolve the corporate

debtor from its liability as guarantor. He submits

that term guarantee is not to be understood narrowly

and it has to be understood to include any security

created by third party to secure repayment of

financial debt including a pledge of shares. The

pledge of shares by corporate debtor to secure the

loan advanced to the parent Company of the corporate

debtor amounts to a guarantee. He lastly submits that

judgment of Anuj Jain needs to be clarified to the

effect that it has been rendered in a specific facts

scenario which does not apply to the present case at

all.

9. Ms. Ami Jain, learned counsel, appearing for the

respondent submits that the appellant is not a

creditor of any nature whatsoever of the corporate

debtor. The appellant has no right of recovery of any

debt from the corporate debtor and has a limited

right of enforcing and realising the value of its

security in the shape of the shares held by the
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corporate debtor in its subsidiary, that is, Gondwana

Engineers Ltd. which is pledged with the appellant as

a security for the loan given to its parent Company,

viz. Doshion Ltd. in accordance with the Pledge

Agreement dated 10.01.2012. The pledge is not, in any

manner, a guarantee under the Contract Act. Section

5(8)(i) of the Code takes within its sweep only any

liability arising out of a guarantee for any of the

items referred to in sub-clauses (a) to (h) of

Section 5(8) of the Code, and not any other

instrument in the nature of a guarantee. The pledge

of shares cannot be equated with the guarantee as

both are absolutely different in terms of their

ramification and implication. The corporate debtor

has not entered into any contract of guarantee with

the appellant to perform the promise, or discharge

the liability of a third party in case of his

default. In the event of default by the borrower, the

appellant has the limited right to realise the money

by sale of shares pledged without requiring the

corporate debtor to perform the promise, or discharge
12

the liability as no promise is given by the corporate

debtor to repay the debt recoverable from the

borrower.

10. Learned counsel for the respondent submits that

the National Company Law Tribunal has rightly

rejected the claim of the appellant as financial

creditor. It is further submitted that the appellant

has already initiated proceedings at the Debt

Recovery Tribunal, Ahmedabad for realisation of its

dues which is an admitted fact. In the Code nowhere

pledge is mentioned. The appellant cannot claim their

pledge agreement dated 10.01.2012 as guarantee as

there is no Deed of Guarantee on the record. The Code

does not deal with recovery.

11. Learned counsel appearing for Bank of

Baroda/Intervenor referring to objects and reasons of

Insolvency and Bankruptcy Code contends that the

purpose and object of the Code is entirely different.

It is not a mechanism for recovery of any amount. The
13

appellant has already moved to Debt Recovery

Tribunal, Ahmedabad.

12. We have considered the submissions of the learned

counsel for the parties and have perused the records.

13. The only question to be considered in this appeal

is as to whether the appellant is a financial

creditor within the meaning of Section 5(8) of the

Code on the strength of pledge agreement dated

10.01.2012 and Deed of Undertaking dated 10.01.2012

entered into with L&T Infrastructure.

14. We may first notice the transaction in question

on the basis of which the appellant claims to be

treated as financial creditor qua corporate debtor.

15. The Facility Agreement dated 12.05.2011 was

executed between the Doshian Ltd. and the L&T

Infrastructure Finance Company Ltd. The corporate

debtor was not a party to the Facility Agreement. It

was the Doshion Ltd., the borrower who was to repay
14

the loan of Rs.40 crores. Schedule-IV of Facility

Agreement is “Security Creation” which is a part of

the Facility Agreement, is as follows:

“SCHEDULE-IV
SECURITY CREATION
The Facility (together with all principal
interest, liquidated damages, fees costs,
charges, expenses and other monies and all
other amounts stipulated and payable to the
Lender) shall be secured by:

1.Second pari-passu charge on all current
assets of the Borrower.

2.Second pari-passu charge on all current
assets of Gondwana Engineers Limited (GEL).

3.Pledge of 100% equity shares together with
all accretions thereon of the GEL.

4.Personal guarantee of promoters of DL namely
Ashit Dhirajilal Doshi, Dhirajilal Shivlal
Doshi and Rakshit Dhirajlal Doshi.

5.Debt Service Reserve Account (DSRA) in the
form of LC/BG for 3 months of interest and
principal payments.

6.Demand Promissory Note.

If, at any time during the subsistence of the
Facility, the Lender is of the opinion that
the security provided by the Borrower has
become inadequate to cover the Facility then
outstanding, then, on the Lender advising the
Borrower to that effect, the Borrower shall
provide and furnish to the Lender, to the
satisfaction of the Lender, such additional
15

security as may be acceptable to the Lender
to cover such deficiency.”

16. Item No.3 of Schedule IV, as noted above, is

Pledge of 100% equity shares together with all

accretions thereon of the GEL. There is Second pari-

passu charge on all current assets of the GEL as per

Schedule IV.

17. The Pledge Agreement dated 10.01.2012 was entered

into between the corporate debtor and L&T

Infrastructure Finance Co. Ltd. Schedule II contains

details of the Securities which are 40,160 shares of

GEL. The corporate debtor has pledged in favour of

lender, the securities, the Clauses of the Pledge

Agreement clearly describe the nature of the security

created by the Pledge Agreement. It is relevant to

notice Clause 2(iii) which is to the following

effect:

“2(iii) The Obligors hereby agree and
confirm that the pledge created/to be
created in terms of this Agreement shall
be a continuing security for the payment
of the Secured Obligations and the due
16

performance by the Obligors of their
obligations hereunder.”

18. The shares of GEL were pledged with L&T

Infrastructure as security. The Deed of Undertaking

which was given on the same day, i.e., 10.01.2012 is

also to the same effect.

19. Now, we may look into the provisions of the

Insolvency and Bankruptcy Code, 2016 relevant for the

present controversy. Part II of Chapter I of the Code

deals with Insolvency Resolution Liquidation for

Corporate Persons. Section 5 is the definition

clause. Section 5(7) defines “financial creditor” in

the following words:

“Section 5(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;”

20. What is ‘financial debt’ is defined in Section

5(8) which is to the following effect:
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“Section 5(8) “financial debt” means a debt
along with 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 de-
materialised equivalent;

(c) any amount raised pursuant to any note
purchase facility or the issue of bonds,
notes, debentures, loan stock or any
similar instrument;

(d) the amount of any liability in respect
of any lease or hire purchase contract
which is deemed as a finance or capital
lease under the Indian Accounting Standards
or such other accounting standards as may
be prescribed;

(e) receivables sold or discounted other
than any receivables sold on non-recourse
basis;

(f) any amount raised under any other
transaction, including any forward sale or
purchase agreement, having the commercial
effect of a borrowing;

(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;

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(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;”

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-
19

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 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
20

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

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 borrower. The Facility Agreement under

which the borrower was bound by the terms and
21

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

borrower who had undertaken to discharge the

liability towards lender. The Pledge Agreement dated

10.01.2012 does not contain any contract that

corporate debtor has contracted to perform the
22

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.

23

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.

27. Learned counsel for the appellant has referred to

a judgment of the Bombay High Court in the Indian Law

Reports, Volume LV 1931, 617, Jagjivandas Jethalal

and another vs. King Hamilton & Co., which was case

arising out of the suit filed to enforce an

equitable mortgage of an immovable property. The
24

defendants as owners of the immovable property in

question created an equitable mortgage upon it as

sureties for the firm of Sarda & Sons who owed money

to the plaintiff. The Bombay High Court had occasion

to consider Section 126 of the Contract Act in the

above case. Noticing the arguments based on Section

126 of the Indian Contract Act raised by the

respondent, the Bombay High Court noticed following

at page 684:

“……Mr. Desai’s answer to that is that
the defendants here were not sureties. He
relies on section 126 of the Indian
Contract Act which provides that a
“contract of guarantee” is a contract to
perform the promise or discharge the
liability of a third person in case of his
default, and the person who gives the
guarantee is called the “surety”. Mr. Desai
says that here there was no personal
obligation on the defendents to pay
anything: they merely handed over their
property as security, and that being so,
there was no contract to perform the
promise or discharge the liability of a
third person. Then he says that in section
135
, which provides that a contract between
the creditor and the principal debtor by
which the creditor makes a composition
with, or promises to give time to, or not
to sue, the principal debtor, dishcarges
the surety unless the surety assents to
such contract, th word “surety” must have
25

the same meaning as in section 126, and
therefore a person who merely deposits the
documents as security is not a surety
within section 135. There may possibly be
something in that argument on the wording
of the sections, but it has been held often
that the Indian Contract Act is not
exhaustive, and, therefore, one has to
consider apart from the Act what the
general is.”

28. The Bombay High Court although observed that on

plain reading of Section 126, there may be some

substance in the submission of Mr. Desai but Bombay

High Court proceeded to examine the general law. The

judgment of the Bombay High Court relied by the

learned counsel for the appellant was on its own

facts and has no bearing on interpretation of Section

5(8)(i) with reference to Section 126 of Contract

Act.

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
26

of JAL) could be financial creditors of the corporate

debtor JIL on the strength of the mortgages created

by 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
27

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. Paragraphs

46 to 50.2 contain elaborate discussion regarding the

essentials of “financial debt” and “financial

creditor” which are to the following effect:

         “46.    Applying     the      aforementioned
    fundamental   principles   to    the   definition

occurring in Section 5(8) of the Code, we have
not an iota of doubt that for a debt to become
‘financial debt’ for the purpose of Part II of
the Code, the basic elements are that it ought
to be a disbursal against the consideration
for time value of money. It may include any of
the methods for raising money or incurring
liability by the modes prescribed in Sub-
clauses (a) to (f) of Section 5(8); it may
also include any derivative transaction or
counter-indemnity obligation as per Sub-
clauses (g) and (h) of Section 5(8); and it
may also be 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). The requirement of
existence of a debt, which is disbursed
against the consideration for the time value
of money, in our view, remains an essential
part even in respect of any of the
transactions/dealings stated in Sub-clauses
28

(a) to (i) of Section 5(8), even if it is not
necessarily stated therein. In any case, the
definition, by its very frame, cannot be read
so expansive, rather infinitely wide, that the
root requirements of ‘disbursement’ against
‘the consideration for the time value of
money’ could be forsaken in the manner that
any transaction could stand alone to become a
financial debt. In other words, any of the
transactions stated in the said Sub-clauses

(a) to (i) of Section 5(8) would be falling
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.

47. 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.
29

48. It is also evident that what is being
dealt with and described in Section 5(7) and in
Section 5(8) is the transaction vis-a-vis the
corporate debtor. Therefore, for a person to be
designated as a financial creditor of the
corporate debtor, it has to be shown that the
corporate debtor owes a financial debt to such
person. Understood this way, it becomes clear
that a third party to whom the corporate debtor
does not owe a financial debt cannot become its
financial creditor for the purpose of Part II
of the Code.

49. Expounding yet further, in our view,
the peculiar elements of these expressions
“financial creditor” and ” financial debt”, as
occurring in Sections 5(7) and 5(8), when
visualised and compared with the generic
expressions “creditor” and “debt” respectively,
as occurring in Sections 3(10) and 3(11) of the
Code, the scheme of things envisaged by the
Code becomes clearer. The generic term
“creditor” is defined to mean any person to
whom the debt is owed and then, it has also
been made clear that it includes a ‘financial
creditor’, a ‘secured creditor’, an ‘unsecured
creditor’, an ‘operational creditor’, and a
‘decree-holder’. Similarly, a “debt” means a
liability or obligation in respect of a claim
which is due from any person and this
expression has also been given an extended
meaning to include a ‘financial debt’ and an
‘operational debt’.

49.1. The use of the expression “means and
includes” in these clauses, on the very same
principles of interpretation as indicated
above, makes it clear that for a person to
30

become a creditor, there has to be a debt i.e.,
a liability or obligation in respect of a claim
which may be due from any person. A “secured
creditor” in terms of Section 3(30) means a
creditor in whose favour a security interest is
created; and “security interest”, in terms of
Section 3(31), means a right, title or interest
or claim of property created in favour of or
provided for a secured creditor by a
transaction which secures payment for the
purpose of an obligation and it includes,
amongst others, a mortgage. Thus, any mortgage
created in favour of a creditor leads to a
security interest being created and thereby,
the creditor becomes a secured creditor.
However, when all the defining clauses are read
together and harmoniously, it is clear that the
legislature has maintained a distinction
amongst the expressions ‘financial creditor’,
‘operational creditor’, ‘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.

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
31

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.

50.1. Keeping the objectives of the Code in
view, the position and role of a person having
only security interest over the assets of the
corporate debtor could easily be contrasted
with the role of a financial creditor because
the former shall have only the interest of
realising the value of its security (there
being no other stakes involved and least any
stake in the corporate debtor’s growth or
equitable liquidation) while the latter would,
apart from looking at safeguards of its own
interests, would also and simultaneously be
interested in rejuvenation, revival and growth
of the corporate debtor. Thus understood, it is
clear that if the former i.e., a person having
only security interest over the assets of the
32

corporate debtor is also included as a
financial creditor and thereby allowed to have
its say in the processes contemplated by Part
II of the Code, the growth and revival of the
corporate debtor may be the casualty. Such
result would defeat the very objective and
purpose of the Code, particularly of the
provisions aimed at corporate insolvency
resolution.

50.2. Therefore, we have no hesitation in
saying that a person having only security
interest over the assets of corporate debtor
(like the instant third party securities),
even if falling within the description of
‘secured creditor’ by virtue of collateral
security extended by the corporate debtor,
would nevertheless stand outside the sect of
‘financial creditors’ as per the definitions
contained in Sub-sections (7) and (8) of
Section 5 of the Code. Differently put, if a
corporate debtor has given its property in
mortgage to secure the debts of a third party,
it may lead to a mortgage debt and, therefore,
it may fall within the definition of ‘debt’
Under Section 3(10) of the Code. However, it
would remain a debt alone and cannot partake
the character of a ‘financial debt’ within the
meaning of Section 5(8) of the Code.”

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
33

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
34

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
35

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.

………………….J.

( ASHOK BHUSHAN )

………………….J.

( R. SUBHASH REDDY )

………………….J.

( M.R. SHAH )
New Delhi,
February 03, 2021.



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