Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc - Avoidance Transactions, Look Back period & other issues.

 Supreme Court of India (26.02.2020) in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019 and other petitions) 

While setting aside the judgment dated 1st August, 2019 of the NCLAT on avoidance of certain transactions under section 43, 45 and 66 of the Code whereby CD had mortgaged its properties for the financial assistance to JAL (holding company), the Hon’ble Supreme Court made important rulings on the following issues;

1. Analysis of sections 43 and 44.

2. Whether impugned transactions are preferential, falling within section 43(2)

3. Look back period in terms of section 43(4)

4. Ordinary Course of Business or financial affairs

5. Duties and responsibilities of RP in CIRP as per section 25 w.r.t. section 43

6. Undervalued and fraudulent transactions

7. Whether lenders of JAL could be categorised as FCs of JIL

 

Excerpts of the orders;

1. Analysis of sections 43 and 44.

# 18. …….  Looking to the contents, context and consequences, we are at one with the contentions urged on behalf of the respondents with reference to the decisions in Devinder Singh (supra) and other cited cases, that these provisions (section 43 & 44) need to be strictly construed. However, even if we proceed on strict construction of Section 43 of the Code, the underlying principles and the object cannot be lost sight of. In other words, the construction has to be such that leads towards achieving the object of these provisions.

# 18.2. However, merely giving of the preference and putting the beneficiary in a better position is not enough. For a preference to become an offending one for the purpose of Section 43 of the Code, another essential and rather prime requirement is to be satisfied that such event, of giving preference, ought to have happened within and during the specified time, referred to as “relevant time”. The relevant time is reckoned, as per sub-section (4) of Section 43 of the Code,.............

# 19. In order to understand and imbibe the provisions concerning preference at a relevant time, it is necessary to notice that as per the charging parts of Section 43 of the Code i.e., sub-sections (4) and (2) thereof, a corporate debtor shall be deemed to have given preference at a relevant time if the twin requirements of clauses (a) and (b) of sub-section (2) coupled with the applicable requirements of either clause (a) or clause (b) of sub-section (4), as the case may be, are satisfied.

# 19.3. On a conspectus of the principles so enunciated, it is clear that although the word ‘deemed’ is employed for different purposes in different contexts but one of its principal purpose, in essence, is to deem what may or may not be in reality, thereby requiring the subject-matter to be treated as if real. Applying the principles to the provision at hand i.e., Section 43 of the Code, it could reasonably be concluded that any transaction that answers to the descriptions contained in sub-sections (4) and (2) is presumed to be a preferential transaction at a relevant time, even though it may not be so in reality. In other words, since sub-sections (4) and (2) are deeming provisions, upon existence of the ingredients stated therein, the legal fiction would come into play; and such transaction entered into by a corporate debtor would be regarded as preferential transaction with the attendant consequences as per Section 44 of the Code, irrespective whether the transaction was in fact intended or even anticipated to be so.

#  20. The analysis foregoing leads to the position that in order to find as to whether a transaction, of transfer of property or an interest thereof of the corporate debtor, falls squarely within the ambit of Section 43 of the Code, ordinarily, the following questions shall have to be examined in a given case:

• (i). As to whether such transfer is for the benefit of a creditor or a surety or a guarantor?

• (ii). As to whether such transfer is for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor?

• (iii). As to whether such transfer has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53?

• (iv). If such transfer had been for the benefit of a related party (other than an employee), as to whether the same was made during the period of two years preceding the insolvency commencement date; and if such transfer had been for the benefit of an unrelated party, as to whether the same was made during the period of one year preceding the insolvency commencement date?

• (v) As to whether such transfer is not an excluded transaction in terms of sub-section (3) of Section 43?

2. Whether impugned transactions are preferential, falling within section 43(2)

# 22.2.1. As noticed, 09.08.2017 is the insolvency commencement date in this case. The transactions in question, even if of putting the concerned properties under mortgage with the lenders, carry the ultimate effect of working towards the benefit and advantage of the borrower i.e., JAL who obtained loans and finances by virtue of such transactions. It is true that there had not been any creditor-debtor relationship between the lender banks and corporate debtor JIL but that will not be decisive of the question of the ultimate beneficiary of these transactions. The mortgage deeds in question, entered by the corporate debtor JIL to secure the debts of JAL, obviously, amount to creation of security interest to the benefit of JAL.

#  22.2.2. Now, the capacity of JAL is admittedly that of the holding company of JIL as its largest equity shareholder ( with approximately 71.64 % shareholding). Moreover, JAL had admittedly been the operational creditor of JIL, for an amount of approximately Rs. 261.77 crores. JAL itself maintains that it had been providing financial, technical and strategic support to JIL in various ways. It is the assertion that apart from making investment in terms of equity shareholding to the tune of Rs. 995 crores, JAL had pledged its 70,83,56,087 equity shares held in JIL in favour of the lenders of JIL; had also entered into Promoter Support Agreement to the lenders of JIL to meet the DSRA obligation of JIL towards its lenders; and had further extended Bank Guarantees of Rs. 212 crores to meet the DSRA obligation of JIL. These assertions, in our view, put JAL in such capacity that it is a related party to JIL and is a creditor as also surety of JIL. In other words, the corporate debtor JIL owed antecedent financial debts as also operational debts and other liabilities towards JAL.

# 22.5. Therefore, in relation to the present case, the answers to questions (i), (ii) and (iii) as referred in paragraph 20 are that: the impugned transactions had been of transfers for the benefit of JAL, who is a related party of the corporate debtor JIL and is its creditor and surety by virtue of antecedent operational debts as also other facilities extended by it; and the impugned transactions have the effect of putting JAL in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53 of the Code. Thus, the corporate debtor JIL has given a preference in the manner laid down in sub-section (2) of Section 43 of the Code.

3. Look back period in terms of section 43(4)

# 23.1.2.We may also observe that if the contentions urged on behalf of the respondents were to be accepted, the result would be of postponing the effective date of operation of sub-section (4) of Section 43 by two years in the case of related party and to one year in the case of unrelated party, and thereby, effectively postponing the application of entire Section 43 for a period of two years! That cannot be and had never been the intention of the legislature. It is also noteworthy that by virtue of proviso to sub-section (3) of Section 1 of the Code, different dates can be provided for enforcement of different provisions of the Code; and in fact, different provisions have been brought into effect on different dates. However, after coming into force of the provisions, if a look-back period is provided for the purpose of any particular enquiry, it cannot be said that the operation of the provision itself would remain in hibernation until such look-back period from the date of commencement of the provision comes to an end. There is nothing in the Code to indicate that any provision in Chapter II or Chapter III be taken out and put in operation at a later date than the date notified. Such contentions being totally devoid of substance, deserve to be, and are, rejected.

# 24. We may now take up the question as to which of the transactions in question would entail in giving preference at a relevant time or otherwise. As noticed, the preference is given to JAL who is a related party of JIL. Hence, the look-back period is two years preceding insolvency commencement date i.e., 09.08.2017 per clause (a) of sub-section (4) of Section 43; and accordingly, the point of enquiry would be as to whether the preference had been given during the period of two years preceding 09.08.2017. Therefore, the transactions commencing from 10.08.2015 until the date of insolvency commencement shall fall under the scanner. As noticed, it has been one of the major contentions of the respondents that most of the impugned transactions were not of creation of any new encumbrance by JIL and in fact, most of the properties in question had already been under mortgage with the respective lenders much before the period under consideration i.e., much before 10.08.2015.

# 24.3.1. It has been one of the major contentions of the respondents that most of the impugned transactions were not of creation of any new encumbrance by JIL and in fact, most of the properties in question had already been under mortgage with the respective lenders. The submissions of respondents in relation to the aforesaid five transactions, that they had been of so-called remortgage/s, carry their own shortcomings and cannot be accepted. In the first place, we are clearly of the view that on release by the mortgagee, the mortgage ceases to exist and it is difficult to countenance the concept of a so called Re-mortgage. ………..   As regards Property No. 5, even if there had been certain previous mortgage transactions falling beyond the look-back period, the property got released on 04.11.2015; and thereafter, the fresh mortgage on 24.05.2016, with increased facility amount from Rs. 1470 crores to Rs. 1767 crores, suffers from the same vice, of being a deemed preference to a related party during the period of two years preceding the insolvency commencement date.

# 24.5. For what has been discussed hereinabove, the answer to question (iv) as referred in paragraph 20 is that the transactions in question had been of deemed preference to related party JAL by the corporate debtor JIL during the look-back period of two years and have rightly been held covered within the period envisaged by sub-section (4) of Section 43 of the Code.

4. Ordinary Course of Business or financial affairs

# 25.5. Looking to the scheme and intent of the provisions in question and applying the principles aforesaid, we have no hesitation in accepting the submissions made on behalf of the appellants that the said contents of clause (a) of sub-section (3) of Section 43 call for purposive interpretation so as to ensure that the provision operates in sync with the intention of legislature and achieves the avowed objectives. Therefore, the expression “or”, appearing as disjunctive between the expressions “corporate debtor” and “transferee”, ought to be read as “and”; so as to be conjunctive of the two expressions i.e., “corporate debtor” and “transferee”. Thus read, clause (a) of sub-section (3) of Section 43 shall mean that, for the purposes of sub-section (2), a preference shall not include the transfer made in the ordinary course of the business or financial affairs of the corporate debtor and the transferee. Only by way of such reading of “or” as “and”, it could be ensured that the principal focus of the enquiry on dealings and affairs of the corporate debtor is not distracted and remains on its trajectory, so as to reach to the final answer of the core question as to whether corporate debtor has done anything which falls foul of its corporate responsibilities.

# 25.6.1. Thus, the enquiry now boils down to the question as to whether the impugned transfers were made in the ordinary course of business or financial affairs of the corporate debtor JIL. It remains trite that an activity could be regarded as ‘business’ if there is a course of dealings,which are either actually continued or contemplated to be continued with a profit motive.

25.6.2. Taking up the transactions in question, we are clearly of the view that even when furnishing a security may be one of normal business practices, it would become a part of ‘ordinary course of business’ of a particular corporate entity only if it falls in place as part of ‘the undistinguished common flow of business done’; and is not arising out of ‘any special or particular situation’, …….. In other words, we are clearly of the view that the ordinary course of business or financial affairs of the corporate debtor JIL cannot be taken to be that of providing mortgages to secure the loans and facilities obtained by its holding company; and that too at the cost of its own financial health. As noticed, JIL was already reeling under debts with its accounts with some of the lenders having been declared NPA; and it was also under heavy pressure to honour its commitment to the home buyers. In the given circumstances, we have no hesitation in concluding that the transfers in questions were not made in the ordinary course of business or financial affairs of the corporate debtor JIL.

# 27. For what has been discussed hereinabove, we are clearly of the view that the transactions in question are hit by Section 43 of the Code and the Adjudicating Authority, having rightly held so, had been justified in issuing necessary directions in terms of Section 44 of the Code in relation to the transactions concerning Property Nos. 1 to 6. NCLAT, in our view, had not been right in interfering with the well-considered and justified order passed by NCLT in this regard.

5. Duties and responsibilities of RP in CIRP as per section 25 w.r.t. section 43

# 28.1. Looking to the legal fictions created by Section 43 and looking to the duties and responsibilities per Section 25, in our view, for the purpose of application of Section 43 of the Code in any insolvency resolution process, what a resolution professional is ordinarily required to do could be illustrated as follows:

• 1. In the first place, the resolution professional shall have to take two major but distinct steps. One shall be of sifting through the entire cargo of transactions relating to the property or an interest thereof of the corporate debtor backwards from the date of commencement of insolvency and up to the preceding two years. The other distinct step shall be of identifying the persons involved in such transactions and of putting them in two categories; one being of the persons who fall within the definition of ‘related party’ in terms of Section 5(24) of the Code and another of the remaining persons.

• 2. In the next step, the resolution professional ought to identify as to in which of the said transactions of preceding two years, the beneficiary is a related party of the corporate debtor and in which the beneficiary is not a related party. It would lead to bifurcation of the identified transactions into two subsets: One concerning related party/parties and other concerning unrelated party/parties with each subset requiring different analysis. The sub-set concerning unrelated party/parties shall further be trimmed to include only the transactions of preceding one year from the date of commencement of insolvency.

• 3. Having thus obtained two subsets of transactions to scan, the steps thereafter would be to examine every transaction in each of these subsets to find: (i) as to whether the transaction is of transfer of property or an interest thereof of the corporate debtor; and (ii) as to whether the beneficiary involved in the transaction stands in the capacity of creditor or surety or guarantor qua the corporate debtor. These steps shall lead to shortlisting of such transactions which carry the potential of being preferential.

• 4. In the next step, the said shortlisted transactions would be scrutinised to find if the transfer in question is made for or on account of an antecedent financial debt or operational debt or other liability owed by the corporate debtor. The transactions which are so found would be answering to clause (a) of sub-section (2) of Section 43.

• 5. In yet further step, such of the scanned and scrutinised transactions that are found covered by clause (a) of sub-section (2) of Section 43 shall have to be examined on another touchstone as to whether the transfer in question has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets per Section 53 of the Code. If answer to this question is in the affirmative, the transaction under examination shall be deemed to be of preference within a relevant time, provided it does not fall within the exclusion provided by sub-section (3) of Section 43.

• 6. In the next and equally necessary step, the transaction which otherwise is to be of deemed preference, will have to pass through another filtration to find if it does not answer to either of the clauses (a) and (b) of sub-section (3) of Section 43.

• 7. After the resolution professional has carried out the aforesaid volumetric as also gravimetric analysis of the transactions on the defined coordinates, he shall be required to apply to the Adjudicating Authority for necessary order/s in relation to the transaction/s that had passed through all the positive tests of sub-section (4) and sub-section (2) as also negative test of sub-section (3).

# 28.2. On a motion made by the resolution professional after and in terms of the exercise aforesaid, the Adjudicating Authority, in its turn, shall have to examine if the referred transaction answers to all the descriptions noted above and shall then decide as to what order is required to be passed, for avoidance of the impugned transaction or otherwise.

6. Undervalued and fraudulent transactions

# 29. Having found that the transactions in question cannot be countenanced, for being of preference during a relevant time to a related party; and having approved the order passed by NCLT in that regard, we do not consider it necessary to deal with the other length of arguments advanced by the learned counsel for parties on the questions as to whether the transactions are undervalued and/or fraudulent too. In the totality of circumstances, we would prefer leaving the said questions at that only, while also leaving all the related questions of law open; to be examined in an appropriate case.

# 29.1. However, we are impelled to make one comment as regards the application made by IRP. It is noticed that in the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. 

As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. 

However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. 

On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefore. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/ fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. 

As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority.

7. Whether lenders of JAL could be categorised as FCs of JIL

# 39.3. The enunciation aforementioned illuminates the reasons as to why at all a financial creditor is conferred with a major, rather pivotal, role in the processes contemplated by Part II of the Code. It is the financial creditor who lends finance on a term loan or for working capital that enables the corporate debtor to set up and/or operate its business; and who has specified repayment schedules with default consequences. The most important feature, as this Court has said, is that a financial creditor is, from the very beginning, involved in assessing the viability of the corporate debtor who can, and indeed, engage in restructuring of the loan as well as reorganisation of the corporate debtor’s business when there is financial stress. Hence, a financial creditor is not only about in terrorem clauses for repayment of dues; it has the unique parental and nursing roles too. In short, the financial creditor is the one whose stakes are intrinsically interwoven with the well-being of the corporate debtor.

# 42.1. As noticed, in the case of Pioneer Urban, a suggestion made on behalf of the respondents with reference to the decision in Krishi Utpadan Mandi Samiti, that when the words ‘means and includes’ are used in a definition, they are to be given a wider meaning and are not exhaustive or restricted to the items contained therein, was not accepted by this Court; and the statement of law in Krishi Utapadan Mandi Samiti was held to be not that of good law for it ignored the earlier precedents of larger and coordinate Benches and was also out of sync with the later decisions on the same point. However, the other extreme of interpretation, as canvassed by the petitioners, that a financial debt could only be a debt which is disbursed against the consideration for the time value of money, and such requirement pervades all sub-clauses (a) to (i), was also not accepted as a matter of statutory interpretation by this Court while observing that the expression ‘and includes’ speaks of subject matters which may not necessarily be reflected in the main part of the definition. Thus, it is evident that this Court did not accept either of the extremities suggested by the parties in Pioneer Urban for interpretation and implication of the expressions ‘means and includes’ in a definition clause of the statute. Significantly, in Pioneer Urban, none of the extremities had any bearing on the conclusion because, eventually, the amendment in question was held to be only clarificatory in nature; and this Court held that the Explanation added to Section 5(8)(f) of the Code by the Amendment Act did not enlarge the scope of the original Section.

# 43.  …. 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 (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 expensive, 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 subclauses (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.

# 47.2. 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 subsections (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 in the character of a ‘financial debt’ within the meaning of Section 5(8) of the Code.

# 54. For what has been discussed hereinabove, on the issue as to whether lenders of JAL could be treated as financial creditors, we hold that such lenders of JAL, on the strength of the mortgages in question, may fall in the category of secured creditors, but such mortgages being neither towards any loan, facility or advance to the corporate debtor nor towards protecting any facility or security of the corporate debtor, it cannot be said that the corporate debtor owes them any ‘financial debt’ within the meaning of Section 5(8) of the Code; and hence, such lenders of JAL do not fall in the category of the ‘financial creditors’ of the corporate debtor JIL.

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Phoenix ARC Pvt. Ltd. Vs. Ketulbhai Ramubhai Patel - Third party Security Interest, at best will be Secured Creditor qua Corporate Debtor and not the Financial Creditor qua Corporate Debtor.

 SCI (03.02.2021) in Phoenix ARC Pvt. Ltd. Vs. Ketulbhai Ramubhai Patel  (Civil Appeal No.5146 of 2019) held that; 

• The Appellate Tribunal held that pledge of shares in question do not amount to “disbursement of any amount against the consideration for the time value of money” and it do not fall within sub-clause (f) of sub-section (8) of Section 5 as suggested by the learned counsel for the appellant.

• that a person having only security interest over the assets of corporate debtor, even if falling within the description of 'secured creditor' by virtue of collateral security extended by the corporate debtor, would not be covered by the financial creditors as per definitions contained in sub-section (7) and (8) of Section 5.

 

Excerpts of the order;

This appeal under Section 62 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Code”) has been filed questioning the judgment of the National Company Law Appellate Tribunal, New Delhi dated 09.04.2019 dismissing the Company Appeal filed by the appellant. The Company Appeal was filed by the appellant against order dated 22.02.2019 of National Company Law Tribunal, Mumbai Bench rejecting the Miscellaneous Application filed by the appellant under Section 60(5)(c) of the Code holding that the appellant is not the financial creditor of the corporate debtor, Doshion Veolia Water Solutions Private Limited.

 

# 2. Brief facts of this case for deciding this appeal are:

L & T Infrastructure Finance Company Limited advanced the financial facility to Doshion Limited, a Company incorporated and registered under the Companies Act, 1956. A Facility Agreement dated 12.05.2011 was executed between the Doshion Limited (borrower) and L & T Infrastructure Finance Company Limited (lender) advancing to the borrower a financial facility of Rs.40 crores repayable in 72 structured monthly instalments. Schedule IV of the facility agreement dealt with “Security Creation”. The Board of Directors of Doshion Veolia Water Solutions Private Limited (corporate debtor) passed a Resolution on 26.07.2011 to give Non-Disposal Undertaking in favour of L & T Infrastructure Finance Company Limited whereby Board was authorised to provide an undertaking to the effect that 100% of their shareholding in Gondwana Engineers Limited (GEL) shall not be disposed of so long as any amounts were due and payable and outstanding under the financial assistance proposed to be provided by L&T Infra to borrower. On 10.01.2012 a Pledge Agreement was executed between Doshion Veolia Water Solutions Private Limited and L&T Infrastructure Finance Company Limited by which agreement 40,160 shares of Gondwana Engineers Limited were pledged as a security. On 10.01.2012 a deed of undertaking was also executed by Doshion Veolia Water Solutions Private Limited in favour of L&T Infrastructure Finance Co.Ltd. By agreement dated 30.12.2013 L&T Infrastructure assigned all rights, title and interest in the financial facility including any security, interest therein in favour of Phoenix ARC Pvt. Ltd., the appellant under Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The borrower, Doshion Limited failed to repay as per agreed terms dated 12.05.2011. The appellant issued a notice dated 19.02.2014 and recalled the financial facility. The appellant filed O.A.No.325 of 2016 before the Debts Recovery Tribunal, Ahmedabad which is said to be pending.

 

# 3. On 31.08.2018, Bank of Baroda filed Company Petition No.CP(IB)1752/MB/2017 before the Adjudicating Authority under Section 7 of the Code to initiate the corporate insolvency resolution process in respect of the Doshion Veolia Water Solutions Private Limited (Corporate Debtor). By order dated 31.08.2018, the Adjudicating Authority admitted the Company Petition and the corporate insolvency resolution process began. The respondent was appointed as the Interim Resolution Professional of the corporate debtor which was later confirmed as the Resolution Professional of the corporate debtor. Pursuant to the commencement of corporate insolvency resolution process in respect of the corporate debtor, the appellant filed its claim for an amount of Rs.83,49,85,667/- with the respondent. The respondent vide email dated 20.09.2018 expressed an opinion that as per the Pledge Agreement submitted by the appellant, the corporate debtor’s liability was restricted to pledge of the shares only. The respondent sought further documents in respect of the appellant’s claim. Although additional documents were submitted by the appellant, the respondent by email dated 23.11.2018 reiterated the earlier view.

 

# 4. The appellant filed M.A.No.1514 of 2018 before the National Company Law Tribunal, Bench at Mumbai in Company Petition No.CP(IB)1752/MB/2017 seeking a direction to the respondent to admit the claim of the appellant as a financial debt with all consequential benefits including voting rights in the Committee of creditors of the corporate debtor. The appellant stated that pledge of the shares by the corporate debtor was in essence a guarantee for financial debt and, therefore, appellant was a financial creditor of the corporate debtor. The Resolution Professional vide email dated 04.12.2018 rejected the claim of the appellant as financial creditor of the corporate debtor on the ground that there was no separate Deed of Guarantee in favour of the Assignor. The respondent filed an affidavit in reply before the Adjudicating Authority. After hearing the parties, the Adjudicating Authority passed an order dated 22.02.2019 rejecting the Miscellaneous Application filed by the appellant. The Adjudicating Authority held that the applicant’s status as financial creditor of the corporate debtor is not proved in the light of Section 5(8) of the Code.

 

# 5. Aggrieved by the judgment of the Adjudicating Authority, the appeal was filed by the appellant before the Appellate Tribunal. The Appellate Tribunal held that pledge of shares in question do not amount to “disbursement of any amount against the consideration for the time value of money” and it do not fall within sub-clause (f) of sub-section (8) of Section 5 as suggested by the learned counsel for the appellant. The Appellate Authority finding no merit in the appeal, dismissed the appeal. Aggrieved by the judgment of the Appellate Tribunal, the appellant has filed the present appeal.

 

# 6. We have heard Shri K.V. Vishwanathan, learned senior counsel for the appellant, Ms. Ami Jain, learned counsel for the respondent. We have also heard learned counsel for the Bank of Baroda as intervenor.

 

# 21. Whether the corporate debtor owed any financial debt to the appellant so as to treat the appellant as financial creditor is the question to be answered. The definition of ‘financial debt’ as contained in Section 5(8) contains the expressions “means” and “includes”. The definition begins with the words “financial debt” means 'a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes'... The main part of the definition, thus, provides that financial debt means a debt “which is disbursed against the consideration for the time value of money”. The definition in the second part gives instances which also includes financial debt. Learned counsel for the appellant in his submission has relied on Section 5(8)(i) to support his claim that the appellant is the financial creditor. Learned counsel for the appellant has referred both sub-clause (b) and sub clause (i) and submits that credit facility which was extended to the borrower is referable to Section 5(8) (b) and the corporate debtor pledged his share to give indemnity for credit facility and which is in a sense of guarantee. The debt is a financial debt within the meaning of Section 5(8)(i) and the appellant is the financial creditor. There can be no dispute that credit facility given by the Assignor to borrower by Facility Agreement dated 12.05.2011 is a credit facility which can be covered under Section 5(8)(b). A bare perusal of Section 5(8)(i) indicates that it contemplates the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses(a) to (h) of clause (8). Sub-clause (i) uses two expressions “guarantee” and “indemnity” for any of the items referred to in sub-clauses (a) to (h).

 

# 22. Chapter VIII of the Indian Contract Act, 1872 deals with “Of Indemnity and Guarantee”. Section 124 defines “Contract of indemnity” and Section 126 defines “Contract of guarantee”. Section 126 which is relevant for the present case is as follows

• “ Section 126. “Contract of guarantee”, “surety”, “principal debtor” and “creditor”.- A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.”

 

23. As clear from the definition a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The present is not a case where the corporate debtor has entered into a contract to perform the promise, or discharge the liability of the borrower in case of his default. The Pledge Agreement is limited to pledge 40,160 shares as security. The corporate debtor has never promised to discharge the liability of the borrower. The Facility Agreement under which the borrower was bound by the terms and conditions and containing his obligation to repay the loan security for performance are all contained in the Facility Agreement. A contract of guarantee contains a guarantee “to perform the promise or discharge the liability of third person in case of his default”. Thus, key words in Section 126 are contract “to perform the promise”, or “discharge the liability”, of a third person. Both the expressions “perform the promise” or “discharge the liability” relate to “a third person”. The Pledge Agreement dated 10.01.2012 does not contain any contract that the promise which was made by the borrower in the Facility Agreement dated 12.05.2011 to discharge the liability of debt of Rs.40 crores is undertaken by the corporate debtor. It was the borrower who had promised to repay the loan of Rs.40 crores in Facility Agreement dated 12.05.2011 and it was the borrower who had undertaken to discharge the liability towards the lender. The Pledge Agreement dated 10.01.2012 does not contain any contract that corporate debtor has contracted to perform the promise, or discharge the liability of the third person. The Pledge Agreement is limited to pledge of 40,160 shares of GEL only. We have noticed above that in the Facility Agreement there is a Security Creation by way of Schedule IV in which 100% equity shares of GEL were pledged by the borrower and second pari-passu charge on all current assets of the GEL was also created as security for loan. It transpires that since some shares of GEL were also with the corporate debtor who is subsidiary Company of Doshion Ltd. the same was also pledged with the lender as additional security by a subsequent agreement dated 10.01.2012.

 

# 24. The Pledge Agreement and undertaking given, entered between Assignor and corporate debtor cannot be termed as contract of guarantee within the meaning of Section 126.

 

# 25. The expression “pledge” is separately dealt with in the Indian Contact Act, 1872. Section 172 defines 'pledge' in the following words:

• “Section 172. "Pledge", "pawnor", and "pawnee" defined.-The bailment of goods as security for payment of a debt or performance of a promise is called "pledge". The bailor is in this case called the "pawnor". The bailee is called "pawnee".:”

 

# 26. The word 'guarantee' and 'indemnity' as occurring in Section 5(8)(i) has not been defined in the Code. Section 3 sub-section (37) of the Code provides that words and expressions used but not defined in the Code but defined in the Indian Contract Act, 1872 shall have the meanings respectively assigned to them.

 

# 29. The learned counsel for the respondent has placed heavy reliance on two-Judge Bench judgment of this Court in Jaypee Infratech Limited vs. Axis Bank Limited (supra). One of the issues which came before this Court was as to whether the respondent (lenders of JAL) could be financial creditors of the corporate debtor JIL on the strength of the mortgages created by the corporate debtor as collateral securities of its holding Co. JIL. In the above case, the AXIS Bank had lent finance to Jaiprakash Associates Ltd.(JAL), the holding company, Jaypee Infratech Ltd.(JIL) had mortgaged several properties as collateral securities for the loans and advances made by the Axis Bank to JAL. Interim Resolution Professional has rejected the claim of the Asix Bank to be recognised as financial creditor of corporate debtor (JIL). The National Company Law Tribunal has approved the decision of Interm Resolution Professional rejecting the claim of Axis Bank as financial creditor against which appeal was filed before the Appellate Tribunal which was allowed. The corporate debtor had filed an appeal before this Court in which appeal one of the issues was as to whether the Axis Bank can be recognised as financial creditor of the corporate debtor on the strength of the mortgaged by the JIL, corporate debtor of its holding Co. JAL. This Court after noticing the facts, noted rival submissions of the parties on the above issue in detail. The two earlier judgments of this Court, namely, Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 and Pioneer Urban Land & Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 were extensively noted. . . . . . . . . .

 

# 30. This Court held that a person having only security interest over the assets of corporate debtor, even if falling within the description of 'secured creditor' by virtue of collateral security  extended by the corporate debtor, would not be covered by the financial creditors as per definitions contained in sub-section (7) and (8) of Section 5. What has been held by this Court as noted above is fully attracted in the present case where corporate debtor has only extended a security by pledging 40,160 shares of GEL. The appellant at best will be secured debtor qua above security but shall not be a financial creditor within the meaning of Section 5 sub-sections (7) and (8).

 

# 31. Mr. Vishwanathan tried to distinguish the judgment of this Court in Jaypee Infratech Limited (supra) by contending that the above judgment has been rendered in the specific facts scenario which does not apply to the present case at all. Shri Vishwanathan submits that in Jaypee Infratech Limited case (supra) corporate debtor had created mortgage for the loan obtained by the parent Company and no benefit of such loan has been received by the corporate debtor whereas in the present case corporate debtor has been the direct and real beneficiary of the loan advanced by Assigner to the parent Company of the corporate debtor. The above point as contended by the learned counsel does not commend us. The present is also a case where only security was created by the corporate debtor in 40,160 shares of GEL, there was no liability to repay the loan taken by the borrower on the corporate debtor in the present case. At best the Pledge Agreement and Agreement of undertaking executed on 10.01.2012, that is, subsequent to Facility Agreement, is security in favour of Lender-Assignor who at best will be secured creditor qua corporate debtor and not the financial creditor qua corporate debtor.

 

# 32. We may notice that the Appellate Tribunal has dealt with Section 5(8)(f) while rejecting the claim of the appellant as to be the financial creditor. It appears that the submission based on Section 5(8) (i) was not addressed before the Appellate Tribunal which has now been pressed before us. We, thus, uphold the decision of the Resolution Professional as approved by the NCLAT as correct. The appellant is not financial creditor of the corporate debtor. Hence, Miscellaneous Application was rightly rejected by the Adjudicating Authority. We, however, make it clear that observations made by us in this judgment are only for deciding the claim of the appellant as the financial creditor within the meaning of Section 5(7) and 5(8) of the Code and shall have no bearing on any other proceedings undertaken by the appellant to establish any of its right in accordance with law. We, thus, do not find any merit in this appeal. The appeal is dismissed. No costs.

 

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TUF Metallurgical Pvt. Ltd. Vs. Wadhwa Glass Processors Pvt. Ltd. - 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”.

  NCLAT (2025.04.04) in TUF Metallurgical Pvt. Ltd. Vs. Wadhwa Glass Processors Pvt. Ltd., [2025) ibclaw.in 472 NCLT , C.P. (IB) No. 356/PB/2019] held that.-  

• A corporate guarantee must include an explicit clause stating that the guarantor shall be responsible for repayment in case of default. We aren’t moved by the argument of the Petitioner alleging the document to be a Corporate Guarantee as the essentials of a Corporate Guarantee aren’t met.

•  A security interest alone does not confer upon the Petitioner the status of a Financial Creditor under Section 5(7) read with Section 5(8) of the IBC.

• 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.

• 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”.

• The Adjudicating Authority is empowered only to verify whether a default has occurred or if a default has not occurred. Based upon its decision, the Adjudicating Authority must then either admit or rej.ect an application respectively. These are the only two courses of action which are open to the Adjudicating Authority in accordance with Section 7(5)”

Excerpts of the Order;

# 1. This petition has been filed by Tuf Metallurgical Private Limited through Authorised Signatory, Shri Vikas Jain, Chief Finance Officer, to initiate Corporate Insolvency Resolution Process (“CIRP”) against M/s. Wadhwa Glass Processors Private Limited (hereinafter referred to as “Corporate Debtor”) under Section 7 of the Insolvency and Bankruptcy Code 2016 (hereinafter referred to as “the Code”) for the alleged default on the part of the Respondent in repayment of debt of Rs. 1,31,66,125/- as on 04.02.2019 inclusive of Interest with respect to Share Pledge Agreement dated 04.04.2017 and Corporate Guarantee dated 31.08.2017. The details of transactions leading to the filing of this application as averred by the Applicant are as follows: 

I. The Corporate Debtor in the current petition is a guarantor to the Principal borrower, Albus India Private Limited.

II. The Principal Borrower through a Board Resolution dated 24.03.2017, consented to the sanction of a loan borrowing amounting to ₹ 5 crore, following which it entered into a Share Pledge Agreement with the Financial creditor dated 04.04.2017 to borrow the aforesaid amount to be repaid at an interest rate of 2% per month.

III. In order to secure repayment under the Credit Facility three directors of the Principal Debtor executed a personal guarantee in form of a Promissory Note dated 18.04.2017 in favour of the F.C. The Corporate Debtor i.e. Wadhwa Glass Processors Private Limited (formerly Albus Conserves Private Limited) extended a Corporate Guarantee in favour of the F.C. for the said credit facility vide Board Resolution dated 31.08.2017 and by creation of equitable mortgage over two properties of the C.D (Located at 10/10 and 24/7, Village Kara, Band Road, Tehsil - Dharsiva, Raipur, Chhattisgarh).

IV. The Financial Creditor recalled the loan via the loan recall notice ated 28.05.2018. Upon dishonor of cheques issued by the  principal borrower and the directors as guarantee a notice was issued by F.C to the Principal borrower and individual directors U/s 138 of Negotiable Instruments Act, 1881. 

V. A guarantee invocation notice titled ‘Demand Notice for Payment on Surety under Contract of Guarantee’ was sent to the Corporate Debtor on 23.11.2018. CIRP was later initiated against the Principal Borrower in C.P. IB No. 1089/ND/2018 – TUF Metallurgical Private Limited Vs. Albus India Limited, admitted on 02.01.2019. As the guarantor, the Corporate Debtor became subject to the present petition filed by the Financial Creditor on

04.02.2019. 

VI. By order dated 05.11.2019 the Resolution Plan of the principal borrower was approved by the Bench No. II of this Adjudicating Authority, the F.C was able to recover an amount of Rs. 1,61,00,000/-.

VII. The principal borrower's total debt was Rs. 6,87,64,499/-, comprising Rs. 5,00,00,000/- as principal and Rs. 1,87,64,499/- as interest. As four guarantors secured the debt, the Corporate Debtor's share was one-fourth, i.e., Rs. 1,71,91,125/-. After deducting Rs. 40,25,000/- (1/4 of the amount recovered from the Principal Debtor), the outstanding liability of the Corporate Debtor is Rs. 1,31,66,125/-.

# 2. This application was previously dismissed by the Adjudicating Authority vide order dated 27.03.2019 on the ground on non-maintainability. Subsequently, the order of the Adjudicating Authority dated 27.03.2019 dismissing Petitioner’s application against the Corporate Guarantor, respondent herein was challenged by the petitioner before Hon’ble NCLAT. The Hon’ble NCLAT vide order dated 21.07.2022 allowed the appeal of petitioner relying on Lalit Kumar Jain V. Union of India & Ors (2021) whereby it was held that approval of Resolution plan doesn’t discharge the Guarantor of its liability. A Restoration Application was filed by the Applicant bearing RA No. 68 of 2022 which was allowed by this Adjudicating Authority, hence the present petition.

# 3. The petitioner made the following averment in the Written Submissions dated 05.072023 to support the maintainability of the present application; The guarantee provided by the Respondent remains valid even after the approval of the Resolution Plan for the Principal Borrower, as the guarantor is not discharged from its obligation merely because the Principal Debtor has been discharged. Therefore, the petitioner may initiate proceedings against the Respondent even after the conclusion of the CIRP against the Principal Debtor.

# 4. The respondent made the following submissions in their reply dated 17.07.2023:

I. The Financial Creditor has stated that the Respondent executed a Corporate Guarantee, but no document has been placed on record to show execution of any 'Corporate Guarantee'. Furthermore, an undated letter referred to as 'Corporate Guarantee' merely refers (albeit falsely) to mortgage of certain properties and does not constitute a Corporate Guarantee and merely a security by way of a mortgage over a land parcel.

II. The Respondent Company could not have furnished the corporate guarantee for the loan availed by the Principal Debtor due to violations of Sections 185, 186, and 180 of the Companies Act, 2013. Respondent's Board was not authorized to create charges on its immovable properties without shareholder approval rendering the transactions unauthorized and in contravention of statutory provisions.

III. A civil suit (CS No. 361/2021) is pending before the District Court, Raipur, seeking a declaration of the corporate guarantee and minutes of the meeting as forged, void, and unenforceable. Additionally, the Chhattisgarh High Court, in Writ Petition COMA No. 1 of 2022 has granted interim relief restraining the creation of third-party interests in the Respondent’s immovable properties, which are allegedly subject to the disputed mortgage

IV. In terms of Section 78 of the Companies Act, 2013, a creditor has to register the particulars of a charge. However, in the present case, neither the Respondent Company nor the Applicant has registered any charge on the immovable properties allegedly mortgaged.

5. In the reply of the Respondent the Petitioner made the following submissions dated 26.11.2024:

I. The guarantee-cum-security document comprises two parts, creating security over the land parcel and providing a guarantee in favor of the Financial Creditor. The relevant extract states: 

• “has resolved to additionally secure your Company as regards the timely repayment of the financial assistance mentioned / extended to Ms/ Albus India Ltd. (the “Borrower”) and also as regards proper, due, effective and assured compliance by the Borrower to the terms and conditions contained in the Agreement exactly as per the obligations of the Borrower.”

The above language used in the guarantee-cum-security document makes it clear that the Corporate Guarantor is guaranteeing the debt of the Principal Borrower.

II. The claim of contravention of Sections 185, 186, and 180 of the Companies Act, 2013 by the Respondent is of no merit. Any procedural deficiencies, such as the lack of shareholder approval or exceeding financial limits under the cited provisions, attract penalties for the management but do not affect the legality of the guarantee.

III. The pendency of a civil suit before the District Court, Raipur, or the interim relief granted by the Chhattisgarh High Court in COMA No. 1 of 2022, does not impact the maintainability of the Section 7 petition, as these proceedings are distinct and donot affect the validity or enforceability of the guarantee. Moreover the proceedings before Hon’ble Chhattisgarh HighCourt in COMA No. 01 of 2022 have been stayed by the order of the Hon’ble Supreme Court in SLP No. 35705 of 2023 dated 22.09.2023.

IV. Non-registration of a charge under Sections 77 and 78 of the Companies Act, 2013, does not affect the validity of the charge or the enforceability of the Corporate Guarantee. It emphasizes that Section 78 allows creditors to register a charge, and any procedural lapse in registration does not extinguish the substantive rights created under the guarantee

Analysis and Findings

# 6. We have heard the Ld. Counsel appearing for the Petitioner and the Respondent and perused the averments and documents placed on record by the petitioner.

# 7. Prior to adjudication of the present application, it is pertinent to refer to Section 5(8)(h) and 5(8)(i) of the IBC, 2016, wherein it has been stated that liability in the form of a guarantee is deemed to be a financial debt the relevant provision has been reiterated as under –

• “(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;

• (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;”

# 8. At the outset, it is imperative to determine whether the Corporate Debtor in the present case qualifies as a guarantor to the Principal Debtor. The Petitioner has relied upon a document alleged to be a Guarantee Deed. However, it is necessary to examine the true nature of the said document. The Hon’ble High Court of Kerala in A.V. Ravi v. M.M. Abdulkhadar [2020 SCC OnLine Ker 8185] has held, 

• “for finding out the true character of the instrument, one has to read the instrument as a whole and then find out the dominant purpose. The test is not what the document calls itself or what form it adopts but what is the true meaning and effect of the terms contained therein”.

# 9. The document annexed as Annexure A-8 to the petition, which the Petitioner claims to be a Letter of Guarantee, does not, at any place, state that its purpose is to serve as a corporate guarantee for the loan agreement between the Financial Creditor and the Principal Debtor. On the contrary, as expressly indicated in its subject line, the document’s sole purpose is to deposit title deeds as collateral security for the loan facility. Furthermore, the document explicitly states: 

• “Also, in the event the Borrower Company commits any default in the repayment of financial assistance or breaches any terms of the Agreement, your Company shall be entitled, without any notice to us/our Company, to proceed with the invocation of your/its rights to get the title transferred in its favour to the extent of the quantum of financial assistance remaining unsettled/unpaid/unadjusted/unsatisfied. Our Company shall, without any demur, cooperate with you and execute and deliver to you such documents at our cost as may be required to perfect your title.”

The foregoing clause clearly stipulates that, in the event of default, the remedy available to the Financial Creditor is the transfer of title of the mortgaged land in its favour. This reinforces the fact that the document merely creates a security interest and does not constitute a guarantee obligating the Corporate Debtor to discharge the liability of the Principal Debtor.

# 10. As per Section 126 of the Indian Contract Act, 1872, a contract of guarantee is an undertaking to perform the promise or discharge the liability of a third person in case of default. An essential element of such a guarantee is an unequivocal and unconditional undertaking to pay, creating an obligation on the guarantor, the germane provision has been reproduced as under –

• “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”.

# 11. The document nowhere contains an express provision where the company unconditionally guarantees the repayment of the loan in case of default. Instead, it merely gives the lender (TUF Metallurgical Pvt. Ltd.) the right to invoke its security interest over the property if the borrower defaults. A corporate guarantee must include an explicit clause stating that the guarantor shall be responsible for repayment in case of default. We aren’t moved by the argument of the Petitioner alleging the document to be a Corporate Guarantee as the essentials of a Corporate Guarantee aren’t met. 

# 12. In order to establish whether the document is a mortgage deed or not a reference to the Section 58(f) of the Transfer of Property Act, 1882 is much warranted, which has been reproduced below:

• “Mortgage by deposit of title deeds.—Where a person in any of the following towns, namely, the towns of Calcutta, Madras, [and Bombay], and in any other town which the [State Government concerned] may, by notification in the Official Gazette, specify in this behalf, delivers to a creditor or his agent documents of title to immovable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title-deeds.”

# 13. Hence, upon perusal of the document relied upon by the Petitioner and the relevant provisions i.e. Section 58(f) of the Transfer of Property Act, 1882, Section 126 of the Indian Contract Act, 1872, Section 5(8)(h) and Section 5(8)(i) of the code it is evident that the document does not constitute a Guarantee Deed but is merely a Mortgage Deed creating a security interest over the property of the Corporate Debtor. A security interest alone does not confer upon the Petitioner the status of a Financial Creditor under Section 5(7) read with Section 5(8) of the IBC.

14. The Hon’ble Supreme Court in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited [(2020) 8 S.C.R. 291] has categorically held that a person having only a security interest over the assets of the Corporate Debtor, without any financial commitment towards its revival or growth, cannot be treated as a Financial Creditor. A mortgage debt, though falling within the definition of 'debt' under Section 3(10) of the IBC, does not amount to a 'financial debt' under Section 5(8). The relevant excerpt from the aforesaid precedent has been reiterated as under –

• “47.1. 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 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.

• 47.2. 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”.

# 15. Similarly the Hon’ble Supreme Court in the case of Phoenix Arc Pvt Ltd vs. Ketulbhai Ramubhai Patel [AIRONLINE 2021 SC 46] further solidified the stance taken by the Supreme Court in Jaypee Infratech Limited, where it was stated, 

• “36. 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”. 

# 16. In light of the foregoing, it is evident that the Respondent does not qualify as a guarantor to the Principal Debtor. Consequently, the Petitioner has no right to initiate CIRP against the Corporate Debtor under Section 7 of the IBC. The Petitioner, at best, may realize its security interest in accordance with the applicable legal provisions. 

# 17. Additionally, it has been opined by the Hon’ble Supreme Court that the role of the Adjudicating Authority is confined to establishing that a Financial Debt exists and there has been a default against the corresponding debt in E S Krishnamurthy & Ors. Versus M/s Bharath Hi Tech Builders Pvt. Ltd. [Civil Appeal No 3325 of 2020]. The germane excerpt from the said precedent has been reiterated as under –

• “The Adjudicating Authority is empowered only to verify whether a default has occurred or if a default has not occurred. Based upon its decision, the Adjudicating Authority must then either admit or rej.ect an application respectively. These are the only two courses of action which are open to the Adjudicating Authority in accordance with Section 7(5)”

# 18. This Adjudicating Authority, being limited to the determination of debt and default within the framework of a summary trial, finds that the other submissions advanced by the Applicant and the Respondent fall beyond its jurisdiction. Consequently, this Authority refrains from delving into them. However, liberty is granted to the concerned parties to approach the appropriate forum for redressal.

# 19. In the light of the above discussion, we come to the unambiguous conclusion that the Appellant has not been able to make out a clearcut case in his favor. The application filed by the petitioner under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) is not maintainable, as the essential conditions of "debt" and "default" prescribed under the provision are not satisfied. As per Section 7(1) of the IBC, a financial creditor may initiate the corporate insolvency resolution process (CIRP) against a corporate debtor only upon establishing the existence of a "financial debt" and a "default" in its repayment. In the present case, the petitioner has failed to demonstrate, with cogent evidence, the existence of a legally enforceable financial debt as defined under Section 5(8) of the IBC, and correspondingly, has not substantiated the occurrence of a default as per Section 3(12) of the Code.

# 20. In view of the observations made herein above, the instant application bearing CP (IB) No. 356/PB/2019 filed by, M/s Tuf Metallurgical Private Limited, (Financial Creditor), under section 7 of the Code read with rule 4 of the Insolvency &; Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiating CIRP against Wadhwa Glass Processors Private Limited (Corporate Debtor) is liable to be dismissed and accordingly, the same stands dismissed.

# 21. Let copy of the order be served to the parties.

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