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Issues: (i) Whether the impugned mortgage transactions constituted preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016 and were outside the ordinary course of business or financial affairs of the corporate debtor; (ii) Whether the lenders of the holding company could be treated as financial creditors of the corporate debtor on the strength of mortgages created by the corporate debtor over its properties as collateral security.
Issue (i): Whether the impugned mortgage transactions constituted preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016 and were outside the ordinary course of business or financial affairs of the corporate debtor.
Analysis: Section 43 deems a transfer preferential where property or an interest therein is transferred for the benefit of a creditor, surety or guarantor on account of antecedent liabilities, and the transfer places such person in a better position than in distribution under Section 53. The relevant time is two years for a related party and one year for others. The Court held that the holding company was a related party and that the impugned mortgages, including re-mortgages made after release of earlier securities, fell within the look-back period. It further held that the transactions were not in the ordinary course of business or financial affairs of the corporate debtor, and that clause (a) of Section 43(3) must be read purposively as requiring the transfer to be in the ordinary course of business or financial affairs of the corporate debtor as well as the transferee.
Conclusion: The impugned transactions were preferential transactions and the avoidance directions were upheld in favour of the appellants and against the respondent lenders.
Issue (ii): Whether the lenders of the holding company could be treated as financial creditors of the corporate debtor on the strength of mortgages created by the corporate debtor as collateral security.
Analysis: A financial creditor must be owed a financial debt, and a financial debt requires disbursal against consideration for the time value of money. The Court held that a third party mortgage securing the debt of another borrower may create a security interest and may make the mortgagee a secured creditor, but it does not, without more, create a financial debt owed by the corporate debtor. The lenders had financed the holding company, not the corporate debtor, and the corporate debtor's mortgage was not a direct borrowing, guarantee or indemnity in respect of their lending.
Conclusion: The respondent lenders were not financial creditors of the corporate debtor.
Final Conclusion: The appellate order was set aside, the avoidance order of the adjudicating authority was restored, and the claims of the respondent banks to participate as financial creditors in the corporate insolvency process were rejected.
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