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
under Section 60(5)(c) of the Code holding that the
appellant is not the financial creditor of the
2
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
3
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
5
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
6
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.
8
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 coextensive 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
11
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 paripassu 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:
17
“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 dematerialised 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;
18
(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 Subclauses (a) to (f) of Section 5(8); it may
also include any derivative transaction or
counter-indemnity obligation as per Subclauses (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 Subclauses (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.
