2020 (10) TMI 962 - AT - Insolvency and Bankruptcy

NCLAT affirms inclusion of OBC and India Bulls claims as financial debts, upholding COC voting rights.

The NCLAT upheld the Adjudicating Authority's decision to include the claims of OBC and India Bulls as financial debts, determining their voting rights in ... CIRP Proceedings - submission of claim before RP on the basis of an Arbitral Award - Change in voting percentage - The Appellant after becoming Member of COC, objected to part claim of OBC, to the extent it is based on corporate guarantees given by the Corporate Debtor for third party dues-debts. Appellant objected that, such part of the claim is not Financial Debt and to that extent voting right percentage of OBC should be reduced. - HELD THAT:- In the present matter, there was disbursal of debt by the bank to the third parties and the Corporate Debtor gave guarantee for repayment of such debt when it became outstanding. Clearly, the loan advanced carried the element of consideration for time value of money and when such disbursal was guaranteed, it has to be treated as a financial debt under Section 5(8)(a) read with (i) of IBC - The third party was advanced debt which was admittedly given by the Financial Creditor to the said third party. Even if Corporate Debtor issued guarantee in recovery proceeding for the financial debt of third party and in default the said guarantee/s have been invoked by the Financial Creditor, the Corporate Debtor is liable to pay the amount being amount of liability in respect of guarantee issued which falls in the definition of Section 5(8)(i) of IBC. Counsel for Appellant did not show as to how findings as recorded by the Adjudicating Authority with regard to India Bulls were not sustainable. Going through the record, we do not find any reason to interfere with the findings as recorded by the Adjudicating Authority in connection to the claim entertained of India Bulls - the inclusion of entire claim of Oriental Bank of Commerce (now PNB) and India Bulls (Respondent No.3) and the determination of the voting percentage of the members of COC on the basis of admitted claims of these Financial Creditors, is legal and proper. Appeal dismissed. Issues Involved:1. Validity of the claim by Oriental Bank of Commerce (OBC) (now Punjab National Bank [PNB]) as a financial debt.2. Validity of the claim by India Bulls Housing Finance Ltd. as a financial debt.3. Determination of voting rights in the Committee of Creditors (COC) based on the claims of OBC and India Bulls.Detailed Analysis:1. Validity of the Claim by OBC as a Financial DebtThe Appellant contested the inclusion of Rs. 32.54 Crores of OBC’s claim, arguing that it was based on corporate guarantees for third-party debts, which should not qualify as financial debt. The Appellant relied on the Supreme Court's judgment in 'Anuj Jain Vs. Axis Bank Limited and Ors.' to assert that such guarantees do not fall under the definition of financial debt as per Section 5(8) of the Insolvency and Bankruptcy Code (IBC).The Adjudicating Authority, however, found that the guarantees had been invoked prior to the initiation of the Corporate Insolvency Resolution Process (CIRP) on 26.09.2018, making OBC a financial creditor. It reasoned that once a guarantee is invoked, the guarantor steps into the shoes of the principal borrower, converting the debt into a financial debt. This interpretation was supported by the Hon’ble Supreme Court’s discussion in 'State Bank of India vs. Kusum Vallabhdas Thakkar,' which held that any benefit to the principal debtor is sufficient consideration for the surety under Section 127 of the Indian Contract Act.The National Company Law Appellate Tribunal (NCLAT) agreed with the Adjudicating Authority’s reasoning, emphasizing that the guarantees issued by the Corporate Debtor were valid financial debts under Section 5(8) of IBC. The Tribunal noted that the essential element of disbursal against consideration for the time value of money was present, as the Corporate Debtor had guaranteed repayment of the loans disbursed to third parties.2. Validity of the Claim by India Bulls Housing Finance Ltd. as a Financial DebtThe Appellant also challenged the inclusion of India Bulls Housing Finance Ltd. as a financial creditor, arguing that the debt claimed was based on a corporate guarantee for third-party debts. The Resolution Professional (RP) and the Adjudicating Authority found that the Corporate Debtor was a co-borrower and had mortgaged its property to secure the loan from India Bulls, making it a financial debt.The NCLAT upheld this finding, noting that the Corporate Debtor was a co-borrower and had created a mortgage on its property to secure the loan, thus qualifying the debt as a financial debt under IBC.3. Determination of Voting Rights in the COCThe Appellant argued that the voting rights of OBC should be reduced, as a significant portion of its claim was based on corporate guarantees for third-party debts, which should not be considered financial debt. The Adjudicating Authority rejected this argument, finding that the entire claim of OBC, including the portion based on corporate guarantees, was valid as financial debt.The NCLAT concurred with the Adjudicating Authority, affirming that the inclusion of the entire claim of OBC and India Bulls for determining the voting percentage in the COC was legal and proper. The Tribunal dismissed the appeal, concluding that there was no substance in the Appellant’s arguments.ConclusionThe NCLAT upheld the Adjudicating Authority’s decision to include the entire claims of OBC and India Bulls as financial debts, thereby determining their voting rights in the COC accordingly. The appeal was dismissed, and no orders as to costs were made.