2020 (2) TMI 1259 - SC - IBC

JAL lenders cannot claim financial creditor status for JIL debt despite mortgage security under Section 5(8) IBC

Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited Versus AXIS Bank Limited ETC. ETC.

Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited Versus AXIS Bank Limited ETC. ETC. - [2020] 221 Comp Cas 625 (SC), 2020 (8) SCC ... Issues Involved:1. Whether the transactions in question deserve to be avoided as being preferential, undervalued, and fraudulent, in terms of Sections 43, 45, and 66 of the Insolvency and Bankruptcy Code, 2016.2. Whether the respondents (lenders of JAL) could be recognized as financial creditors of the corporate debtor JIL on the strength of the mortgage created by the corporate debtor, as collateral security of the debt of its holding company JAL.Analysis of the Judgment:Issue 1: Preferential, Undervalued, and Fraudulent TransactionsPreferential Transactions:- Legal Framework: Section 43 of the Insolvency and Bankruptcy Code (IBC) deals with preferential transactions and relevant time. A corporate debtor is deemed to have given a preference if the transaction involves a transfer of property or an interest thereof for the benefit of a creditor, surety, or guarantor for or on account of an antecedent financial debt or operational debt, and the transfer puts such creditor, surety, or guarantor in a beneficial position than it would have been in the event of distribution of assets in accordance with Section 53.- Relevant Time: For related parties, the relevant time is two years preceding the insolvency commencement date, and for unrelated parties, it is one year preceding the insolvency commencement date.- Transactions in Question: The transactions in question involved mortgaging properties of JIL to secure loans for JAL. These transactions were found to be preferential as they were for the benefit of JAL, a related party, and were within the relevant time of two years before the insolvency commencement date.- Ordinary Course of Business: The transactions were not made in the ordinary course of business or financial affairs of JIL. The ordinary course of business or financial affairs of JIL did not include mortgaging its assets to secure the debts of its holding company JAL.- Conclusion: The transactions were preferential and fell within the mischief of Section 43 of the IBC. NCLT's order declaring these transactions as preferential was upheld.Undervalued and Fraudulent Transactions:- Undervalued Transactions: Section 45 of the IBC deals with undervalued transactions. A transaction is considered undervalued if it involves a transfer of one or more assets by the corporate debtor for a consideration significantly less than the value of the consideration provided by the corporate debtor.- Fraudulent Transactions: Section 66 of the IBC deals with fraudulent trading or wrongful trading. The transactions were alleged to be fraudulent as they were intended to defraud the creditors of JIL.- NCLT's Findings: NCLT found that the transactions were undervalued and fraudulent as they were made without any consideration to JIL and were intended to defraud the creditors of JIL.- Conclusion: The transactions were found to be undervalued and fraudulent. However, the court did not delve deeply into these aspects as the transactions were already held to be preferential.Issue 2: Financial CreditorsLegal Framework:- Financial Creditor: As per Section 5(7) of the IBC, a financial creditor is a person to whom a financial debt is owed.- Financial Debt: Section 5(8) of the IBC defines financial debt as a debt along with interest, if any, which is disbursed against the consideration for the time value of money.Arguments:- Appellants' Argument: The lenders of JAL could not be considered financial creditors of JIL as the mortgages were not for any disbursement of debt to JIL but were for securing the debts of JAL. The transactions did not involve any consideration for the time value of money for JIL.- Respondents' Argument: The respondents argued that the creation of mortgages by JIL to secure the debts of JAL made them financial creditors of JIL as the transactions were akin to guarantees and created pecuniary liabilities on JIL.Court's Analysis:- Nature of Transactions: The transactions were third-party securities where JIL mortgaged its properties to secure the debts of JAL. These transactions did not involve any disbursement of debt to JIL.- Financial Debt: The transactions did not qualify as financial debt as they did not involve any disbursement against the consideration for the time value of money to JIL.- Conclusion: The lenders of JAL could not be categorized as financial creditors of JIL. The orders of NCLT rejecting the claims of the lenders of JAL to be recognized as financial creditors of JIL were upheld.Conclusion:1. The transactions in question were preferential, undervalued, and fraudulent within the meaning of Sections 43, 45, and 66 of the IBC. The order of NCLT declaring these transactions as preferential was upheld.2. The lenders of JAL could not be categorized as financial creditors of JIL as the transactions did not involve any disbursement of debt to JIL against the consideration for the time value of money. The orders of NCLT rejecting the claims of the lenders of JAL to be recognized as financial creditors of JIL were upheld.